P2P

Lending
An
Innovative
Financing
Option in
Crisis

Aman Mishra

amann1986@gmail.co
m
 Table of Contents

Executive Summary……………………………………………………2

Customer Perspective………………………………………………….3.

Need Gap

Services Offered

Market Size……………………………………………………………..4

Value Proposition………………………………………………………5

Business and Revenue Model………………………………………….6

Sales and Distribution Model………………………………………….7

Regulation………………………………………………………………8

Competition…………………………………………………………….8

SWOT Analysis………………………………………………………...9

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 Social Lending

Executive Summary

Ever since BitTorrent and other protocols arrived on the internet scene, the world
witnessed a mammoth exchange of media across the web. It brought together a happy
and a contented family of leechers and seeders.

The quest for lower rates and easier repayment norms continues for customers
grappling with interest rates as high as 36% on their credit cards and personal loans.
The traditional business model for banks has been that of collecting low-cost retail
deposits and lending them at much higher rates. The rates offered are a function of the
administrative and risk-related costs associated with the customer and his funding
requirements.

On the other hand, retail investors continue to seek investment options that can beat
inflation and fixed deposits and not be over-leveraged in the stock markets at the same
time.

The world is witnessing a shift in social interactions with the advent of Web 2.0. The
online communities are transforming the way people interact with each other across
the globe. Peer-to-Peer (P2P) lending is an integration of these online communities
and financial services. It leverages on the P2P networks concept of connecting
internet users directly with each other. P2P lending platforms enable the lenders and
borrowers to directly deal with each other, facilitating the lending transactions.

The advantage of P2P lending is the likelihood for the borrower to secure the loan at a
lower rate of interest as compared to a bank loan and the likelihood for the lender to
receive a better interest rate as compared to a bank deposit. P2P lending asset class is
different from the traditional savings account or stock market linked investments. The
only risks involved here are the counterparty risk and the concentration risk.
Concentration risk can be greatly mitigated by spreading the loan amount across a
large number of borrowers. This it is independent of any other investment in the
existing portfolio of the lender. Lenders get to choose their rates and loan lengths.
Lenders can also decide to lend only to borrowers having a specific credit profile.

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Customer Perspective

Need Gap

With the liquidity crisis, banks across the globe have tightened their lending criteria.
This has made small borrowers look at alternate avenues for credit. Also, it has made
it increasingly difficult for borrowers with little or poor credit history to get loans.
The sub-prime crisis has had very bad repercussions on the job market as well. With
economies going into recession, job cuts have become a common phenomenon. This
again made banks skeptical about giving loans to people who have jobs in badly hit
industries, people who are newly employed, or who don’t have any existing relation
with the bank.

This situation creates a market based on the demand for easy availability of loans at a
cheap rate of interest. The interest rates increased due to the surge in demand for
loans. As central banks have resorted to rate cuts to boost economies, lenders may
find the P2P rates very attractive.

The basic aim of P2P lending is to match borrower’s demand with the lender’s supply
and in the process avoid banks and other middlemen. The guiding principle for P2P
lending is that borrowers and lenders are better-off dealing directly with each other,
rather than through a financial institution. The money transactions between the
borrowers and the lenders are anonymous. The borrowers are also not troubled with
marketing calls as is the case with the traditional online lending companies.

Product/Service

The services that shall be offered are:

• Loans

• Matchmaking of borrowers and lenders

• Social Networking

• A platform for sharing ideas and views pertaining to the world of finance

• Trading of other financial instruments(A possible future offshoot)

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Market Size

P2P lending is still in its nascent stage. With evolving models, better regulatory
mechanisms and improved credit rating facility, we may see more and more lenders
and borrowers participating in this new way of lending. In the coming years, it can
have the depth to support a larger participation. Also, with internet users spending
more time on social networks, it is likely to generate higher interest in people in the
times to come. Sites like zopa.com and prosper.com have come up in the US and are
gaining trust among venture capitalists for their growth and proliferation.

P2P in India is a new concept . A website rangde.com is in operation and is into P2P
lending. It is backed by ICICI Foundation. It is currently operational in Maharashtra
and Tamil Nadu.

Value Proposition

The biggest benefit that such business can offer is ease of access to financing at a
cheap, negotiated and an agreeable rate. If backed by proper regulatory framework,
P2P lending serves as a successful medium for quick and successful verification of
data pertaining to KYC-AML norms. With the UID project in the offing, data can be
accessed and verified in a jiffy. With a firm regulatory environment and robust
security measures, it may also accommodate trading of financial instruments(futures,
forwards etc.) as well.

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Business and Revenue Model(xyz.com as a sample site)

Borrowers & Borrowers Lenders bid on Home

Lenders join post credit listings ownership,
indicating a Credit history
Xyz.com and credit listing minimum rate
link their bank along with the debt-to-
either
accounts with reason for loan for entire income
xyz’s account and max amount or information
interest part of the loan about
rate borrower

During Borrower is
repayment xyz
debits
offered
money from loan at
borrower’s the lowest
account and bid
credits to
lenders
rate
account on
pro-rata basis

The revenues for the site shall come in form of commissions originating from the
deals as well as charges from advisory services. Moreover, a charge can be levied for
borrowers registering on the site. This will create an appropriate entry barrier since
social network ought to have prudent users and in this case, we need people who are
in actual need of loans or really want to provide loans. On quitting, a certain
percentage of the registration amount may be refunded to the user.

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Sales and Distribution Model

In case of normal lending, banks assume risk and act as the middlemen

Lender Bank Borrower

while in case of P2P lending, a lender or a group of lenders lends to multiple

borrowers , thus, spreading the risk. This eliminates any intermediary.

Lender(s) P2P Lending Borrowers

Server

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Regulation

Since P2P firms do not collect the money from lenders but only offer a platform for
lenders and borrowers to connect, they don’t fall under Reserve Bank of India (RBI)
regulations. However, one needs protection and support from the government for
accelerated growth. We need a regulatory method so that we can have pool funds, so
that loans can be disbursed as and when required.

RBI, however, has regulations only for banks and non-banking financial companies.
Peer-to-peer lending does not fall under our purview. Currently, RBI has a regulation
in place applicable to the unorganized sector, including moneylenders and others, but
this merely prohibits lending at exorbitant rates.

The advantage one has is that of checking out a borrower’s credit history from CIBIL.
The problem of assigning a credit rating remains. Thus a new rating system has to be
enforced in order to ensure proper standards and to ensure that the money is in safe
hands.

Competition

Banks still remain a preferred destination for availing finance. Since the Indian
Banking System withstood the shocks of the global meltdown owing to prudent
lending norms, the customers’ trust in them is firmly vested. Moreover, the behemoth
PSU banks which were inflexible and obsolete in customer service have woken to the
gauntlet thrown by the private sector banks. With such intense competition in the
banking sector, it is no secret that finding alternate means of financing will be
foolhardy and tedious. With increased economies of scale and scope, banks may
actually resort to hosting a P2P lending system of their own. This will eat into the
share of exclusive P2P lending sites.

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SWOT Analysis

Strengths

• Ability to offer loans at a lower rate than the bank to borrowers

• No interest and credit risk

• Minimal brick and mortar presence required

Weaknesses

• Can’t cater to large corporates due to loan size

• Collection is a problem in case of default as no collateral is taken from

borrowers

• Commission and annual maintenance charges are the only source of income

• Lacks the marketing muscle of large banks

• Lack of regulatory mechanism

Opportunities

• The growing craze of social media and high level of involvement of people in
social connectivity

• A large number of sub-prime borrowers whom the banks are reluctant to offer
crefit

• Large untapped market of investors planning to invest in a different asset

class

• Sharing of common platform between P2P lending sites to offer credit across
different networks

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Threats

• Social media may get out of trend and people may turn out of P2P lending

• High counterparty risk for lenders as compared to bank deposits

• Acquisition threat from banks due to size advantage

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