Xavier Institute of Management, Bhubaneswar

Commercial Banking Project

Topic- Peer to Peer Lending: Innovation and Fall Out

(Under the guidance of Dr. Bishnu Prasad Mishra)

Submitted by: Group 8

Sai Shreya Sukla- UM20052
Ansuman Panda-UM20257
Priyadarshini Bhattacharya-UM20283
Ritesh Sahu – UM20285
Ritika Pal Chaudhuri- UM20286
Mitanshi Khandelwal-UM20338
Srimoyee Mukherjee-UM20356
CONTENTS

Serial No Topic Page No

1 History of P2P lending 1

2 Understanding P2P lending 2

3 Crowdfunding vs P2P vs Traditional Banking 3

4 Why do we need P2P in India 6

5 Major Players in P2P lending 7

6 Global P2P scenario 8

7 P2P and India 9

8 Advantages of P2P lending 10

9 Disadvantages of P2P lending 11

10 Innovation and Trends in P2P lending 11

11 RBI Regulations for P2P lending 13

12 Conclusion 16

13 References 17

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History of Peer-to-Peer lending (P2P)

Since 2012, India has been a large Peer-to-Peer borrowing and lending sector, with independent
moneylenders well-served for a quick personal loan, with bank and formal loans accounting for only a
miniscule 15% of the market share. Even now, the majority of Indians borrow money from friends,
family members, acquaintances, money lenders, and business contacts. The world's largest offline
crowdfunding industry is now morphing into a massive online peer-to-peer lending economy. P2P loans
provide the same hassle-free access, reliability, and speed that earlier offline financial loans did for
resolving a variety of home and commercial financial concerns.

While the United Kingdom was the first country to create a peer-to-peer lending internet platform called
Zopa, P2P lending began to take shape in 2012. With the rise of the internet, Indians had access to peer-
to-peer loans that were free of paperwork and long loan processing times. P2P loans are also available
to persons with poor credit or a low CIBIL score. As a result, customers who have been denied a loan
by a bank due to a poor credit history now have another option. Because India is predominantly a
service-based economy, many enterprises in the country are asset-light.

Many businessmen were unable to obtain loans for business purposes since banks needed enterprises to
have a high asset strength. P2P loans are also quite popular among business people nowadays, with 30
percent of all loans for business purposes being taken out on reputable peer-to-peer lending websites
like LenDenClub. Individuals can always rely on peer-to-peer lending to get them out of a financial
bind.

Lending is not a new notion in India. We have a history, albeit a shady one, of people lending money
or their worth to others and manipulating the borrowers for their own gain. This type of lending was
eventually replaced by a strong banking system, which addressed the flaws and vices of money lending.
With the passage of time, we now live in a world that is continuously changing due to technological
breakthroughs. Technology has had an impact on every part of our lives, for better or for ill. The way
in which financial demands are addressed has also changed dramatically.

Currently, millions of borrowers and lenders in India use more than 30 internet companies for fast
personal loans, company loans, festival loans, and other types of loans. The greatest of them, notably
LenDenClub, are known for their customer-friendly services and for providing online lending services
for a low price. Lenders can look at the various interest rates for borrowers based on the credit score
they receive when investing in loans, and they can divide their net investment into any number of
fragments, each with a different interest rate, resulting in amazing and appealing portfolios.

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In India, online lending is extremely popular, much like it is in the rest of the world. By 2020, India
will have over 1 billion internet users, each with access to online lending 24 hours a day, seven days a
week. P2P lending will be regulated shortly as well, but the RBI will avoid doing anything that will
stifle innovation.

Understanding P2P lending

Individuals can acquire loans directly from other individuals through peer-to-peer (P2P) lending,
bypassing the financial institution as a middleman. P2P lending has grown in popularity as a result of
websites that make it easier for people to conduct it.

“Social lending” or “crowd lending” are other terms for peer-to-peer lending. Although it has only been
around since 2005, it already has a crowded field of competitors, including Prosper, Lending Club,
Peerform, Upstart, and StreetShares.

P2P websites function similarly to marketplaces. They connect people or corporations who wish to lend
money with people who need money. It’s a way for borrowers to receive money without having to go
to traditional lenders like banks or building societies.P2P lending interest rates are often greater than
those offered by regular savings accounts. In general, the higher the interest rate, the greater the danger
that the borrower would be unable to repay the debt.

An investor first creates an account on the site and deposits funds to be distributed as loans. The loan
application submits a financial profile to which a risk category is assigned, which affects the interest
rate the applicant will pay. The loan applicant can look over the offers and choose one. (Some applicants
split up their requests and accept various offers.) The platform is used to handle money transfers and
monthly payments. Lenders and borrowers can choose to negotiate or the process can be completely
automated.

The greater a P2P website's default rate is, the more people or businesses who are unable to repay their
debts. The money we lend through a P2P website is not insured by the Financial Services Compensation
Scheme, unlike bank and building society savings. However, a few of P2P services offer contingency
or provision funds that pay out if a borrower defaults on their loan. If you're considering becoming a
lender, it's crucial to understand what's protected by these provision funds. If we repay the loan early or
late, one could not make as much money as they intended. One can just lend the money out again if a
loan is repaid early. However, there's a chance one won't be able to lend at the same interest rate.

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Crowdfunding vs P2P vs Traditional Banks

Crowd Funding: The use of a small number of funds from a large number of people to finance a new
business initiative is known as crowdfunding. Crowdfunding uses social media and crowdfunding
platforms to connect investors and entrepreneurs, with the potential to encourage entrepreneurship by
broadening the pool of investors beyond the typical circle of owners, families, and venture capitalists.

Types of crowdfunding

Crowdfunding based on securities allows anyone to invest in privately-held businesses (aka, startups).
Investors receive the promise of stock, future shares, or another security issued by the company in
exchange for capital in this sort of campaign. We'll focus on equity-based crowdsourcing, but there are
several other types of crowdfunding to consider, including:

When someone donates to a specific cause or charity, this is known as donation-based crowdfunding
(think GoFundMe).

It's exactly what it sounds like reward-based crowdfunding. People give in order to gain access to a
specific prize associated with the project they support. For example, you could contribute to the
development of a new product line and then receive the product in return.

Peer-to-peer lending allows people to borrow money from other people without having to go through a
bank or other financial institution. Consider it debt crowdfunding.

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Individuals can invest in real estate developments through real estate crowdfunding. This is particularly
beneficial for consumers who want to invest in real estate but don't want to deal with mortgage brokers,
real estate agents, or contractors. This is a sort of securities crowdfunding that is more specialized.

Crowdfunding for human capital is a way for people to raise funds to support their personal progress or
projects. In exchange for a part of the prizes, investors are given the opportunity to support a project.
Many poker players, for example, crowdfund money to play and then distribute a portion of their profits
to their backers.

Few CrowdFunding sites for small businesses: Kickstarter, Indiegogo, Crowd Supply, Crowdfunder,
Chuffed

P2P Lending

Peer to Peer [P2P] investment, often known as P2P lending, is an innovative way of debt financing.
This investment opportunity connects you directly to borrowers via a P2P internet platform, allowing
you to lend to creditworthy SMEs and earn interest. Individuals can acquire loans directly from other
individuals through peer-to-peer (P2P) lending, bypassing the financial institution as a middleman.

P2P lending has grown in popularity as a result of websites that make it easier for people to conduct it.
“Social lending” or “crowdlending” are other terms for peer-to-peer lending. Although it has only been
around since 2005, it already has a crowded field of competitors, including Prosper, Lending Club,
Peerform, Upstart, and StreetShares.

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There are three parties involved in P2P lending:
1. The Investor or the Lender: Lends capital over the loan term
2. The Borrower: Commits to repaying the capital plus interest
3. The P2P Platform: Facilitates transactions and performs credit assessment of the borrower

The Evolution of Peer-to-Peer Lending

Early on, the P2P lending system was considered as a way to provide credit to those who might
otherwise be turned down by traditional lenders, or as a way to consolidate student loan debt at a lower
interest rate. P2P lending platforms, on the other hand, have grown in popularity in recent years. Most
are now aimed towards people who wish to pay off credit card debt at a cheaper rate of interest. P2P
lending services are already offering home improvement loans and auto financing.

Rates for applicants with strong credit are frequently lower than equivalent bank rates, however rates
for those with bad credit can be significantly higher. As of December 2019, LendingTree.com had
personal loan rates ranging from 10.19 percent to 24.98 percent. 1 As of February 2020, Peerform had
loan rates ranging from 5.99 percent to 29.99 percent. 2 According to CreditCards.com, the average
credit card interest rate was 17.30 percent as of February 5, 2020.

For lenders, peer-to-peer lending provides a means to earn interest on their cash at a higher rate than
traditional savings accounts or certificates of deposit (CDs).

Traditional Banking

Traditional bank and lender business loans are a type of funding available to small businesses. This is
the most prevalent sort of loan financing employed by small and mid-sized businesses. Traditional
finance has the lowest interest rates and the most favorable terms of any commercial credit alternative.
Traditional financing is, in reality, the standard against which all other lending options are measured,
as the rates supplied by traditional banks are referred to as "bank-rate."

Traditional lending is where the borrowing company's operations are analyzed and its future cash flow
is forecasted.

Commercial finance offered by traditional banks (both large and small), community banks, credit
unions, and SBA lenders is known as bank-rate business loans. The most prevalent types of commercial
lending companies that provide debt finance to small and mid-sized businesses are bank-rate lenders.

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Bank-rate funding is available in both secured (collateralized) and unsecured forms, with almost two-
thirds of all traditional lender business loans backed by some type of collateral.

Why do we need P2P in India?

Peer to peer lending (P2P lending) is one of the ways to get money for your company. P2P is an online
platform that provides lenders and borrowers with convenience, flexibility, and a variety of lending and
borrowing options. The P2P model brings together lenders and borrowers, making it easier to connect
lenders and borrowers. Borrowers can acquire cash at a lower interest rate than banks, while lenders
can earn higher interest than bank deposits.

P2P Business Model

The crowd-funding model underpins the peer-to-peer lending paradigm. The majority of P2P lending
platforms are structured as NBFC fintech businesses (Non-Banking Financial Companies). Unlike
traditional banking and financial institutions, the P2P model is a cutting-edge lending model designed
to address the demands of today's businesses. Faircent, Paisadukaan, Finzy, Rupeecircle, and others are
some of the P2P platforms that provide services.

Individuals, high net worth individuals (HNIs), Hindu Undivided Families (HUFs), and other non-
banking institutions can use P2P lending to pool their savings.

An auction is held under the P2P business model, in which a lender can submit a bid for a borrower's
loan requirements, which the borrower can accept or reject. In addition, the platform can provide
services such as credit assessment, loan recovery, and so on. In general, the platform orchestrates the
transaction between the lender and the borrower.

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Major Players in P2P lending

Since their inception in 2006, the United States has played a significant role in the global growth of
P2Ps. LendingClub, Prosper, OnDeck, and Upstart are among the household brands in the P2P industry,
with stratospheric yearly growth rates due to the sophisticated and tech-savvy domestic environment,
as well as different legislative changes.

FundingCircle, Zopa, RateSetter, and LendingWorks are a few of the major P2P businesses in the UK
market that have contributed to a rapid growth in volume in the UK P2P industry. In 2019, the P2P
market is expected to be valued about $8.03 billion. FundingCircle is the market leader in the United
Kingdom, having financed £5.8 billion to around 77,000 small British firms since its inception in 2010.
The average loan age being 3 months and majorly for the small businesses.

The primary strategies used by players in the P2P Lending Market in India are partnerships and
acquisitions, as well as product creation and upgrade. Faircent, RupeeCircle, i2iFunding, Lendbox,
Paisa Dukan, OMLP2P, i-Lend, LenDenClub Cash Kumar, and Kiva Microfunds are among the leading
companies in the P2P Lending Market.

To capitalise on the underserved market, Faircent.com offers loans in COVID-19 low impact Green
Zones from May 2020. Matrix Partners, a New York-based investment firm, invested over $1.7 million
in Liquiloans, an Indian peer-to-peer lending platform, in January 2019. The funds would help the
company establish itself as a brand and gain credibility.

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Global P2P scenario

In 2019, the P2P market reached a global high of roughly £ 46,706 million in terms of loan volume, and
it shows no signs of slowing down as it prepares to give banks a run for their money (literally). Zopa
was the first peer-to-peer platform. A corporation founded in the United Kingdom in 2005 that
introduced the concept of generating funds from any ordinary individual across the world who had spare
cash.With the emergence of such a business model, the United States debuted Prosper and LendingClub
in 2006, two heavyweights in today's situation.

China replicated this system as well, with the P2P phenomenon exploding in 2007. In the UK, AltFi
reported £6.17 billion in annual borrowing in 2019 through P2P. Between the first quarter of 2005,
when Zopa Ltd. established the business, and the first quarter of 2020, total loan origination volumes
rose at a CAGR of 175 percent. According to statistics, the overall P2P Lending Market is valued at
USD 34.16 billion in 2019 and is anticipated to grow at a CAGR of 50.2 percent to USD 589.05 billion
by 2025, with the APAC region leading the way.

With a 52 percent annual growth rate, the P2P business has a bright future as Fintech is encouraged and
embraced across the world. With the global economic climate favourable to its expansion, the number
of small businesses and potential investors seeking greater and more tailored returns is on the rise. As
internet penetration grows, the market size of P2P players will grow even more as prospective borrowers
seek lower and more flexible conditions to acquire cash. With each passing day, the P2P sector appears
to be improving as corporations pass more strict criteria and offer new services in order to gain public
trust.

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P2P and India

The P2P lending Market in India is expected to reach $10.5 billion by 2026, increasing at a CAGR of
21.6 percent between 2021 and 2026. The rise of the Peer-to-Peer Lending Market may be linked to
increased transparency due to the incorporation of technology such as block chain and smart contracts
into lending platforms. The Indian government's ardent support for cashless technology has also
managed to overhaul the financial system, challenging conventional institutions such as banks' long-
held monopolies.

Platform-based lending will undoubtedly acquire significant traction in the coming years. Due to
benefits such as speedier loan approvals and disbursals, online peer-to-peer lending controls the bulk of
the market share in the worldwide P2P lending industry. Furthermore, one of the motivations for P2P
firms to function in an offline mode is the operational costs associated with physical facilities. In India,
regulations governing offline lending limit the industry.

Over the next several years, the real estate application is anticipated to increase at the quickest rate,
with a CAGR of 25.7 percent. P2P financing is being viewed as the greatest alternative to traditional
financial institutions in the real estate market.

Real estate projects sometimes need substantial sums of money, making it difficult for real estate
developers to get loans from banking institutions. This is a key motivator for developers to use P2P
social lending systems. Furthermore, limiting credit rules in banks and other financial institutions is
expected to help market growth as demand from SMEs and consumer credit grows.

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Advantages of P2P lending

1. Higher return to investors- The return on P2P lending for investors is much higher compared
to the savings and investment products offered by banks and traditional financial institutions.
In a pandemic affected economy, there has been a return of 12-14% in one year.

2. Low interest rate for borrowers- P2P lending eliminates intermediation costs and offers lower
interest rates. The reason can be the greater competition between lenders and lower origination
fees.

3. Lending criteria - P2P provides borrowers who might have a low credit score and are usually
denied by banks when they apply for loans. Also, getting an initial quote does not affect the
credit score.

4. Flexibility- They offer loans for a short period of time too. This remains an accessible source
of funding for borrowers. P2P loans are mostly unsecured implying that a borrower can get a
loan even if they do not have any collateral to offer. Many P2P lending platforms allow the
settlement of balance early with no extra fees.

5. Custom-made offers- P2P platforms provide tailor-made loans depending upon the borrower’s
risk profile and need for the loan. They offer loans for every occasion, and can choose the loan
amount, interest rate or tenure of the loan.

6. Faster turnaround time- P2P platforms have all their processes in online mode, the
application process is faster and far more convenient than the traditional loan application
process.
7. Risk diversification for lenders- P2P allows investors to diversify the risks associated with
lending as it provides a scope to invest their capital across multiple loans. Investors have the
opportunity to spread their funds across multiple loans and borrowers, helping to manage risk
exposure through diversification.

8. Lower rates of denial- Due to the collective lending approach of the P2P platform, the
probability of borrowers being rejected for loans is comparatively lower than the traditional
banks.

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Disadvantages of P2P lending

1. High Credit Risks- In the Peer-to-peer model lenders are exposed to high credit risks due to
the high possibility of default especially by low credit rating borrowers. Many borrowers
applying for loans on the peer-to-peer platforms have low credit ratings and this especially
becomes a lucrative option for them as credit availability to them from banks is limited.

2. No Facility of Secured Lending- Peer to Peer Lending Platforms are not allowed to offer
secured/ collateral-based loans to their customers as per RBI Guidelines, discouraging broader
adoption of the peer-to-peer platforms by the risk-averse lenders.

3. Intermediation Charges- Peer-to-peer Lending Models are not peer-to-peer in the real sense.
The platforms act as intermediaries and charge fees for the facilitation of transactions and
diversifying lending just like Banks. Peer-to-peer platforms generally charge loan arrangement
fees, matchmaking fees or sometimes even make profits by charging and offering different rates
of interest from borrowers and lenders.

4. Delay in Match-Making- One of the drawbacks of the P2P platform is that the matchmaking
process takes time, leading to delays in lending and during that period lenders lose out on
interest income. Likewise, borrowers may also face similar problems like the unavailability of
credit immediately.

5. Time Consuming Process- Popular peer-to-peer platforms may offer too many choices
lending. And, in order to hedge credit risk, diversification in lending is an optimal solution.
However, screening borrowers, checking their credit ratings etc. may be a tedious and time-
consuming task for many customers.

6. No Secondary Market for Investments- The investment made in the Peer-to-Peer market is
quite difficult to liquidate before the maturity period, as finding a buyer of the same is quite
difficult since there is no organized secondary market. Even though few Peer-to-Peer platforms
offer assistance in refinancing, but this facility is not widely available.

Innovation and Trends in P2P lending:

P2P lending platforms have traditionally been tasked with recruiting borrowers who are unable to obtain
loans from banks or other financial institutions. While this is somewhat accurate, it in no way diminishes
the quality of borrowers attracted to P2P lending companies' low-cost loan options.

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Lockdown across nations, on the other hand, has resulted in limited movement and little to no access to
banking infrastructure. While most traditional financial institutions have an online loan application
system, few have gone to the trouble of developing systems that allow for online verification and
processing of such loan requests. As a result, while borrowers can request for loans online, traditional
financial institutions are unable to deliver funds.

Online lending platforms offer an advantage in this area. Banks have spent a significant amount of effort
and money developing an online infrastructure that covers the entire process, from application to
disbursement. P2P lending platforms provide a pleasant online experience for both borrowers and
lenders, from a simple online application procedure through signing a legally binding loan agreement
to financial transfers between lenders and borrowers through a third-party escrow fund.

These platforms have adapted swiftly to the changing environment and switched from physical to e-
verification of borrowers at their homes and offices (using location mapping through geo-tagging and
video interviews). NACH mandate collection has been switched to the RBI and NPCI-backed e-
mandate.

As the novel coronavirus (COVID-19) crisis sweeps the globe, a close eye on market developments and
consumer behaviour around the world have been kept and the current market trend has been identified
analyzing the impact of the pandemic.

The growing number of small and medium-sized organizations (SMEs), particularly in developing
nations like India, is driving the market. For their critical finance needs, these organizations use P2P
lending platforms to obtain simple loans at reasonable interest rates. These services are especially
popular because of the low fees and the variety of payment alternatives available to consumers.

P2P lending solutions have also decreased the need for physical branches, staffing, and upkeep in an
office setting, resulting in a good market outlook. Furthermore, governments in a number of countries
are taking steps to encourage the use of P2P lending platforms by establishing a framework that
encourages the industry's growth while minimizing the danger of potential problems.

The use of blockchain technology in these models is driving the market even further. Its use helps to
make the entire process more transparent and equitable for both lenders and borrowers. Furthermore,
due to the sudden spread of the coronavirus sickness, many people are now using peer-to-peer (P2P)
arrangements to pay for their treatment expenses across the healthcare sector (COVID-19).

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The need for P2P lending is being driven by expanding digitization in the banking industry, as well as
an increase in the number of small and medium-sized businesses (SMEs).

Aside from that, P2P lending has grown in popularity by providing unsecured loans to pay people's
medical bills. Furthermore, the expanding need for P2P lending is expected to be fueled by the growing
student population, which will require educational loans, as well as increased real estate lending.
According to IMARC Group, the worldwide peer to peer (P2P) lending sector would continue to grow
strongly over the next five years.

RBI guidelines for P2P lending

A person, a group of people, a HUF, a firm, a society, or any artificial body, such as a company, can
engage in the P2P lending platform. The Master Directions for NBFC Peer to Peer Lending Platform
released by the RBI in 2017 control P2P lending. With RBI clearance, only an NBFC can register as a
P2P lender. The RBI should issue a certificate of registration to every P2P lender.

Every non-banking NBFC-P2P should register with the Mumbai-based Department of Non-Banking
Regulation. In addition, the P2P must have a net-owned fund of at least $20 million and meet other RBI
requirements. A leverage ratio of no more than 2 is required of P2P lenders.

Borrower Uses the P2P Model

Both lenders and borrowers must register on the P2P lending platform's website. Before letting potential
borrowers and lenders participate in their business, the platform screens them. The P2P conducts a
Know Your Customer (KYC) process to verify the borrowers.

P2P Business Loan Policy

P2P should have a policy in place that establishes the eligibility criteria for participants, the price for
P2P services, and the guidelines for matching lenders and borrowers. Loans between lenders and
borrowers must be approved by a contract signed by both parties.

Unsecured loans are available through peer-to-peer lending. P2P must make the technique of credit
assessment and factors considered available on its website, as well as the grievance redressal procedure,
an explanation of the business model, contact information for the grievance redressal officer, and so on.

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Guidelines for P2P Participants

A P2P lender should do due diligence on its participants, conduct credit checks and risk profiling on
the borrowers on its platform, and disseminate the results to potential lenders. A P2P lender should have
documentation of loan agreements and supporting paperwork, as well as get prior and express approval
from the participant to access their credit information. A peer-to-peer lender should also help with loan
disbursement, repayment, and recovery.

In the P2P platform, funds will be transferred through an escrow account managed by a bank-sponsored
trustee. Two escrow accounts should be maintained by the P2P, one for receiving cash from lenders and
the other for collecting from borrowers. Cash transactions are not permitted on P2P.

Borrowing & Lending Limits

The minimum loan amount might range from Rs 500 to Rs 750. The maximum amount per lender is set
at Rs 50,00,000 (in total) across all P2P platforms. If the loan amount exceeds Rs 10,00,000, a certificate
from a practicing Chartered Accountant verifying a minimum net worth of Rs 50,00,000 is required.

In one-on-one lending, a single lender's total loan to a single borrower should not exceed Rs 50,000.
The P2Ps should get a certificate from the borrower or lender saying that the borrowing and lending
limitations have been followed.

Tenure for Lending and Disclosure Agreement

The maximum term for funds lent through peer-to-peer lending is three years. The borrower's
information, including credit score and loan terms, must be disclosed to the lender through the P2P.
Other than the borrower's personal identification and contact information, a P2P must reveal the lender's
information to the borrower.

Compliance with Credit Information Companies (CIC) and others

All CICs should accept a P2P as a member. The P2Ps' responsibilities include reporting data (including
historical data), keeping and maintaining credit information, and updating information to the CICs on a
monthly basis. The P2P must also file quarterly statements with the RBI, including a statement of loans
disbursed, outstanding, and closed for the quarter. A statement of funds kept in the escrow account is
also required.

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Default in repayment of P2P loans

The P2P is in charge of the repayment of loans made through their network. To reduce loan payback
defaults, the P2P should have a strong procedure for screening participants and updating data. The P2P
can also assist in the recovery of loans made through its platform.

The P2P, on the other hand, is liable for the activities of its service providers, which includes recovery
agents. The P2P should also keep the information about its participants that is available with its service
providers confidential.

Cancellation of registration of P2P NBFC

The RBI has the authority to cancel a P2P NBFC's registration in the following circumstances:

1. The P2P NBFC ceases to operate as a P2P lending platform in India.

2. Failure to adhere to the terms and conditions of the CoR.
3. P2P no longer qualifies for the CoR.
4. Failure to comply with any direction made by the bank.
5. Failure to maintain accounts, publish financial statements, and report the financial situation as
required by any RBI regulation, order, or instruction.
6. Failure to submit or offer books of account or other relevant papers for inspection when the
RBI requests them.

Conclusion
Peer to peer loans is a form of direct money loans to individuals or companies without an
official financial institution participating as an intermediary in the agreement. P2P loans are
usually performed through online platforms that correspond to lenders with potential
borrowers.
P2P loans offer both insured and unsecured loans. However, most P2P loan loans are not
guaranteed personal loans. Guaranteed and secured loans are rare for industry and are generally
supported by luxury products. Due to some unique features, Peer To peer loans are considered
an alternative source of financing. The Advantages include improvised returns to investors,
readily accessible sources of funding and lower interest rates. The disadvantages might be
credit risk due to significant lower rating of the borrowers, lack of insurance or government

15
protection. There are legislation hinderances also as some jurisdictions still do not allow the
P2P lending platforms to operate, hence making their services redundant there.

The above diagram shows the overall functioning of P2P lending process.

Peer to peer loans is a crowdfunding form used to lift loans for people who need to borrow,
from people who want to invest. They allow people to borrow and provide money without any
financial institution as an intermediary and prolongs credit to borrowers who cannot obtain it
through traditional financial institutions. The main crust idea is that savers get a higher interest
by paying their money instead of keeping it, and borrowers get funds in relatively low interest
rates. Normally use an online platform in which borrowers and credit institutions are recorded.
The due diligence is carried out before allowing the parts to participate in any loan or loan
activity. All P2P platforms will now be considered non-banking and regulated financial
companies and regulated by RBI. The detailed of these regulations have already been discussed
above and more intricate details and updates can be found on the RBI website.

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References:
1. https://online.norwich.edu/academic-programs/resources/pros-and-cons-peer-peer-lending-
small-business
2. https://www.carltonbonds.co.uk/knowledge-hub/p2p-lending/advantages-and-disadvantages-
peer-to-peer-lending
3. https://economictimes.indiatimes.com/wealth/p2p/seven-benefits-of-p2p-loans/loans-for-
every-need/slideshow/65899359.cms
4. https://www.myconstant.com/blog/the-advantages-and-disadvantages-of-peer-to-peer-
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advantages-and-disadvantages-of-peer-to-peer-lending&utm_campaign=incontent
5. https://corporatefinanceinstitute.com/resources/knowledge/finance/peer-to-peer-lending/
6. https://www.businesstoday.in/personal-finance/investment/story/14-percent-return-in-a-year-
p2p-lending-catches-investors-eyes-294575-2021-04-28
7. https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=11137&Mode=0

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