New Dawn of P2P Lending

P2P lending in India is an emerging trend for ensuring easy access of finance for MSME Entrepreneurs. By Faiz Askari

NEW DELHI: 27th July, 2016: It was till few years ago, when the biggest challenge for any entrepreneur was about accessing finance. Yes, this was a challenge few years ago. Luckily, we have just entered into a phase where access to capital or finance is no more a challenge for Indian entrepreneur. But, now the challenge is about affordability and experience in availing finance. Indian entrepreneurs are now struggling to get affordable finance with a better experience.  While we cleared the first challenged of capital finance access these remaining challenges are still haunting the entrepreneurs.

As an alternative to the conventional processes of getting finance, the concept of Peer-to-Peer (P2P) lending is an upcoming success story in India. The P2P or lending marketplace is becoming an great option for Indian entrepreneurs who would like to access capital at an affordable cost. As an emerging industry practice, lending money to businesses through online platforms and tools has globally emerged as a viable alternative to traditional banking channels. This is a sort of match making process between borrowers and banks.

This practice is getting onto the mainstream in many developed and developing countries such as USA, Brazil and China etc. but going forward the market signs shows that conventional banking processes cannot be replaced.

The merits of P2P lending and its attempts to reduce the delivery time and operational costs of lending, particularly for small-ticket loan along with the main advantage for borrowers to have a chance of getting better rates than the traditional banks can offer and for lenders to get a higher return than the one earned from the savings account go hand in hand with the higher risks associated with the platform that is unregulated.

In India, this is a fast growing trend, but most of the P2P lending platforms are on nascent stage. Though, experts believe that this is a high potential area but need some more time in industry.

From the entrepreneur’s perspective it is a welcome step and such an innovative tool can cover the loop holes in the traditional system but it cannot altogether replace the same.

Key Elements of P2P Lending

The platforms have to consider carefully the aspect of due-diligence. There are chances of due diligence not been carried out as effectively as expected by the beneficiaries of the P2P lending due to apprehensive risk management system put in place which might ultimately lead to loss of enthusiasm in the platform as a whole.

However, with P2P lending platform, the biggest issue of outreach can be resolved upto much extent. Now, MSMEs can approach banks, banking organizations at ease, as per their own convenience.

Further, the ecosystem of providing open access to CIBIL or Bureau information to the P2P platforms and better contract enforcement (akin to DRT / SARFAESI) may go a long way in a healthy growth of P2P platforms and their filling the finance void faced by most of the MSMEs.

The connectivity between banks and MSMEs will become far more superior with such platforms. The P2P lending platforms although at a nascent stage, needs to be extremely clear towards the offerings they are making and have to adopt appropriate mechanisms for staying protected from fraud entities and NPAs.