a study on impact of p2p lending towards social...

A STUDY ON IMPACT OF P2P LENDING TOWARDS SOCIAL AND

ECONOMIC BENEFITS

K. KRISHNAKUMARI, Dr.SRIRAM K

[email protected]

[email protected]

ABSTRACT:

Traditional Financial Institutions in India follow various “Hard Policy Rules” for providing

unsecured loans to individuals. The conservative procedures of Financial Institutions may result

in denial of the loans, even the needy borrower of money is able to pay back. The peer –to-peer

lending (P2P) is an innovative online lending platform, provides loans to the borrower through

complete online technology. The low or no credit history people generally don‟t get loans in

Financial Institutions. The p2p lending platforms provide promised loans at a lower interest rates

compared to call money or micro-finance. Therefore p2p lending platforms can help the under

privileged sections of the society, who are in need of money in their emergences. This research

paper focuses on how p2p lending platforms helping not only subprime groups of society in

meeting financial requirements like Business improvement, Medical emergencies, Educational

loans etc, but catering to the needs of all the classes of the economy. The interest rate on loans

depends on the risk category of the borrower.

Keywords: P2P Lending, Risk category, Credit history, Unsecured loans

Journal of Interdisciplinary Cycle Research

Volume XII, Issue I, January/2020

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Introduction:

Conventionally in India, individuals approach Banks and other financial institutions for getting

loans .The Banks and other Financial Institutions in India follows different financial checks like

credit history for providing unsecured loans to individuals. The conservative procedures of

Financial Institutions may result in denial of the loans, even the deprived borrowers are able to

pay back. They can opt for an another platform for borrowing funds that is - peer-to-peer

lending.

Peer-to-Peer lending is one of the fintech-based lending was launched by Zopa in 2005 ,a U.K

based firm and the idea of P2P business spread all over the world like United States of America,

China, Japan, Australia, Germany, India etc. P2P lending is an online platform matches the

borrowers and lenders. This platforms provides an opportunity to the borrowers to get the loans

hastily at viable interest rates and the lenders(investors) gets good returns on their investment

compared to other traditional financial instruments.

Peer-to-Peer Lending in India:

The way of Indian Government shift towards cashless economy and recent policies are

encouraging innovation in products through adoption of technology in the financial sector. The i-

Lend was the first peer-to-peer lending firm was launched in India 2012. The P2P lending in

India planning to grow into a $ 5 billion industry by 2023.At present in India , the P2P lending

firms are more than 30 like Faircent, , i2iFunding ,LendBox, LenDenClub, IndiaMoneyMart,

Monexo, Rupaiya Exchange, LoanBaba, CapZest etc.

Recent Notification by RBI

The Reserve Bank of India passed notification on 18th

September 2017 that peer to peer lending

(P2P) companies providing loans will be treated as non-banking financial companies

(NBFCs).RBI announced various rules and regulations to safeguard the interest of lenders and

borrowers of P2Plending platforms. The RBI guidelines helps the P2P lending firms to establish

greater stability and creditability like other traditional investments that are stocks, mutual funds,

fixed deposits, SIPs etc. The guidelines are as below:



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1. All the existing P2P lending firms must get registration with the department of Non-

Banking regulation located in Mumbai within 3 months.

2. The P2P lending firms should have a net –owned fund of not less than Rs.2 crore. They

have to maintain a leverage ratio not less than 2:1

3. The P2P lending firms shall transfer funds between participants through ESCROW

account only. The lenders and borrowers ,across all P2P, should be capped at Rs.10 lakh.

The lender can lend to the same borrower cannot exceed beyond Rs.50,000. This will

help the lender to diversify the risk.

4. The P2P lending firms must submit data to credit information companies (CICs).This

helps to reduce default rates and more credibility to the system.

How Peer-to-Peer lending works :

Rewards to borrowers:

1. Borrowers who are not able to get loan from banks or traditional NBFCs, the P2P lending

platforms gives an opportunity to borrow.

2. P2P platforms providing loans at cheaper rate compared to personal loans and credit card

from banks or Financial Institutions

3. There is no pre-payment fees if the borrower wants to close the loan early.



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Rewards to Lenders/ Investors

1. Lender/Investor can diversify the portfolio

2. Lender/Investor can expect high and guaranteed returns.

3. Lender/Investor can choose borrower to whom they want to lend money

Review of literature:

GirijaGadre (2017), “P2P typically uses an online platform where the borrowers and lenders

register themselves. Due diligence is carried out before allowing the parties to participate in any

lending or borrowing activity. All P2P platforms will now be considered non-banking financial

companies and regulated by RBI”.

Investopedia (2017), “Peer-to-peer lending (P2P) also known as „social lending‟ is a method

of debt financing that enables individuals to borrow and lend money - without the use of an

official financial institution as an intermediary. Peer-to-peer lending removes

the middleman from the process, but it also involves more time, effort and risk than the general

brick-and-mortar lending scenarios”.

Objectives of the study:

1.The study is concern with the P2Plending platforms provides loans to low or no credit history

people.

2. The study is about evaluation of the risk category of borrowers in P2Plending platforms

3. The study is focus on the impact of P2P lending towards social and economic benefits .

Methodology

This study is to understand how the P2P lending platforms helps the society to get unsecured

loans to meet their requirements like Business improvement, Education and health emergencies

etc. A descriptive study is carried on and collected some cases from P2P platforms like

Faircent.com , i2i Funding etc. A chi square analysis conducted to check the risk category

borrowers moves up on the value chain in a win –win manner.



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P2P lending platforms contributing to Indian Economy through SMEs

Contribution of SMEs in Indian Economy is great but still they are facing challenges to get quick

and easy loans through Banks and Financial Institutions because of the SMEs improper

management in credit flows. Online P2P lending companies not only lends to Individuals

borrowers but also to SMEs and MSME by financing them through convenient credit products.

Data Analysis and Interpretation:

The P2P lending platforms provides loans to Business renovation, personal loans, house

renovation, Marriage, Education, Health emergencies etc. The below diagrams shows the loan

purpose distribution



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Loan Purpose Distribution

Interpretation:

The above table shows that Business renovation 25.53%, personal loans 18.21%, house

renovation 25.31% , Self Marriage 3.45%, Relatives Marriage 11.15%,Education 2.91%, Health

emergencies 3.10%,purchase of vehicle 0.87%,Holiday travel 0.26%, and others 8.99%

Credit evaluation process of borrowers:

These P2P lending platforms follows Robust and automated credit evaluation process of

borrowers. Credit Evaluation Model which is based on various factors like social media, CIBIL

report, bank account statement etc. P2P lending platforms in-house credit evaluation team

assesses the credit risk of each borrower and classifies the loan proposal in the suitable risk

Category from A-F.. „A‟ being the category with the strongest credit profile and „F‟ being the

weakest. These platforms recommends the interest rates based on the risk category.



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Interest rates are recommended by P2Plending platforms based on risk category:

Category wise distribution of loans and average interest rates

Category Amount % of portfolio Avg. Interest

Rate

A 635000 0.42 13.07 %

B 3482000 2.32 16.66%

C 9960000 6.62 18.72%

D 59170000 39.36 20.74%

E 33940000 22.58 23.26%

F 43155000 28.70 27.28%

Total 150342000 100 22.93%



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Interpretation:

From the above graph says that the interest depends on credit risk category of borrowers. The

interest are by P2Plending platforms based on risk category. If we observe the above table the

risk category A‟s interest rates are lower than other risk categories namely B,C,D,E,F. The risk

category F is paying higher interest rates compared to other categories namely A,B,C,D,E.

Avg Interest rates

A

B

C

D

E

F



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Risk category wise Loan default amount:

Risk

Category

Total No.of loans 90 – 120 days of

delay

120-180 days

of delay

>180 days of

delay

NO AMOUNT NO

AMOUNT

NO

AMOUNT

NO

AMOUNT

A 2 6,35,000

B 14 34,82,000 2 1,26,439

C 54 94,60,000 6 3,07,713

D 399 5,69,55,000 6 4,95,732 3 4,16,874 17 8,35,401

E 213 3,28,85,000 3 1,46,029 4 3,38,806 15 9,86,383

F 264 4,22,60,000 11 11,34,140 59 60,91,765

TOTAL 946 14,56,77,000 9 6,41,761 18 18,89,820 99 83,47,701

Interpretation:

The risk category of „A‟ with strong profile are not defaulted but the risk category „F„ are

defaulted with high amount compared to others. If we observe the above table ,when 90-120

days the risk category F are not defaulted compare to D and E. The risk category E is defaulted

lesser than D in 90-120 days delay. This shows that the successive repayment of EMIs will

improves CIBIL score promotes to higher category and able to get loans at lower interest rate .

Chi- square test is conducted for D,E and F risk category. The Chi- square value is 7.2395 and p

value is 0.2678 . Which indicates there is a significant difference between D,E and F. The risk of

default is more in F than D and E. Higher credit grade the loan of the default decreases



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Trickle -down effect of P2P lending for the bottom line unprivileged sections of society

These P2P lending platforms is not only based on the interest margin from the borrowers EMI

but also to maximize the borrowers chance of getting funded over the borrowers cost of funding.

These P2P platforms are able to service the undeserved section of the society who benefitted due

to financing through the platform. Improves their economy and society in large.

Some of the success stories of borrowers are mentioned below:

Case :1

Mr. Rahul is a 17-year-old business owner in Ranchi, Jharkand, with strong monthly turnover

and 2 self-owned factories unable to get loans from banks and other financial institutions to set

up a water purification facility. Through P2P Platforms, he registered

Case :2

Mr. P.Kanwal, who runs the Bhatinda furniture business, wants to improve the business as well

as plan to send his daughter to Canada. Banks declined to lend. Based on his strong business

profile, he received loans through P2P Platforms.

Case :3

Ms. Mamta, a 50-year-old woman, is the owner of Blue Lotus, who partners with NGOs,

designers and companies to develop, promote and sell brands and products. Blue Lotus has 22

export, retail, and wholesale brands. Because of her age limit, Bank loan is difficult to obtain.

After assessing her credit profile P2Plending site, 5 lakhs rupees will be loaned to increase

theirexports business and renovation.

Case :4

Ms. Bhavika is active in the manufacture of PVC and plastic granules in Jaipur, Rajasthan. She

had excellent credit record that she could easily obtain loans from banks. But because of the

online process and easy submission of documents, she decided to register with P2Plending

platform to get unsecured loans



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Case :5

Small – Scale industries are encouraged by Government to expand their business. Mr.N.Sharma ,

is an exporter to manufacturing garments in Ludhiana and exports to Gulf countries. He requires

a short –term fund to pay laborers. Small – Scale industries are encouraged by Government to

expand their business.P2P lending platforms fully –automated credit evaluation mechanism and

online process provides faster and cheaper access to credit for these SSIs.

Other cases where p2p lening platforms provides Unsecured loans to invest in agricultural,

Business, children education, Medical emergencies etc.

Conclusion :

The P2P lending platforms provides unsecured loans to low or no credit history people. By the

successfully repaying EMIs of borrowers of lower category D,E and F is not only getting the

loans but also promotes himself out the higher categories. This can result in CIBIL score

improvement and as collar he may be eligible to get loan at successive lower interest rates. This

way social and economical pyramid of the subprime borrowers moves up on the value chain in a

win-win manner.



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Bibliography :

1. https://razorpay.com/blog/peer-to-peer-lending-and-its-growth-in-india

2. https://www.faircent.com/social-impact-report

3. https://www.i2ifunding.com/

4. https://finzy.com/articles/peer-to-peer-lending

5. vinodkothari.com/wp-content/uploads/2017/10/India-P2P-report-brochure.pdf

6. https://www.investopedia.com/terms/p/peer-to-peer-lending.asp

7. https://economictimes.indiatimes.com › Wealth › Borrow

8. https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11137

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%3A%2F%2Fwww.faircent.com%2Feasy-access-to-credit-challenges-faced-by-smes-

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