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A STUDY ON IMPACT OF P2P LENDING TOWARDS SOCIAL AND
ECONOMIC BENEFITS
K. KRISHNAKUMARI, Dr.SRIRAM K
manchikantikumari@gmail.com
doc_sriram@yahoo.com
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
ISSN NO: 0022-1945
Page No:284
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:
Journal of Interdisciplinary Cycle Research
Volume XII, Issue I, January/2020
ISSN NO: 0022-1945
Page No:285
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.
Journal of Interdisciplinary Cycle Research
Volume XII, Issue I, January/2020
ISSN NO: 0022-1945
Page No:286
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.
Journal of Interdisciplinary Cycle Research
Volume XII, Issue I, January/2020
ISSN NO: 0022-1945
Page No:287
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
Journal of Interdisciplinary Cycle Research
Volume XII, Issue I, January/2020
ISSN NO: 0022-1945
Page No:288
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.
Journal of Interdisciplinary Cycle Research
Volume XII, Issue I, January/2020
ISSN NO: 0022-1945
Page No:289
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%
Journal of Interdisciplinary Cycle Research
Volume XII, Issue I, January/2020
ISSN NO: 0022-1945
Page No:290
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
Journal of Interdisciplinary Cycle Research
Volume XII, Issue I, January/2020
ISSN NO: 0022-1945
Page No:291
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
Journal of Interdisciplinary Cycle Research
Volume XII, Issue I, January/2020
ISSN NO: 0022-1945
Page No:292
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
Journal of Interdisciplinary Cycle Research
Volume XII, Issue I, January/2020
ISSN NO: 0022-1945
Page No:293
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.
Journal of Interdisciplinary Cycle Research
Volume XII, Issue I, January/2020
ISSN NO: 0022-1945
Page No:294
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
9. https://www.google.com/search?q=p2p+lending+process+images&client=firefox-
b&tbm=isch&tbo=u&source=univ&sa=X&ved=2ahUKEwi1yf--
zN3dAhUMQY8KHfk2BCkQsAR6BAgEEAE&biw=1024&bih=454#
10. http://www.business-standard.com/article/finance/peer-to-peer-nbfc-lending-restricted-
to-36-months-or-less-117100401292_1.html
11. https://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&
uact=8&ved=2ahUKEwiHmMjn9d_dAhVEuo8KHYK8AAcQjRx6BAgBEAU&url=https
%3A%2F%2Fwww.faircent.com%2Feasy-access-to-credit-challenges-faced-by-smes-
and-micro-smes&psig=AOvVaw0n8TJqidv_ACSc8MxB34Z9&ust=1538300420892423
.
Journal of Interdisciplinary Cycle Research
Volume XII, Issue I, January/2020
ISSN NO: 0022-1945
Page No:295
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