Rishabh Kumar
Data from present short-term lending markets suggests the possibility of this in the coming years. According to RBI data, personal loan demand remained the highest among all other sectors at 42% in Q1 FY 22-23. Traditionally, short-term borrowing is limited to bank credit, credit cards, credit unions, retirement fund redemption, finance companies and friends & family. Each of them carries their shortcomings. Bank credit & finance company borrowers are liable to provide collateral assets and pay loan servicing & processing fees. This is added on by penalties in case of monthly payment delay. Rates often depend on the credit score of the borrower and banks may also sell your debt to any other institution which can lead to changes in loan structuring, fees & maybe even interest rate on short notice. Credit cards may be a good way to boost the credit score but a monthly payment miss may lead to an immediate effect on creditworthiness.
More importantly, the cost of borrowing is much higher than bank loans which will be added on by fees & penalties for payment delays. Credit cards are also an emerging domain for fraudsters and thus we have to regularly check our bills to match purchases, adding time and effort to the process. Credit unions tend to solve some of the issues about banks & credit cards but they have exclusive access for members only and generally cap the maximum amount of borrowing, not to forget that we have to contribute to the fund regularly. Retirement funds like Provident Fund are essentially meant for retirement corpus and redeeming them must be an option only in case strictly needed in the absence of other options.
Peer-to-peer lending or crowd lending is an emerging solution to many of the problems faced by the borrower in the prevalent methods of borrowing. It allows individuals to directly lend and borrow money, thereby eliminating intermediary institutions like banks, finance companies & regulatory hurdles surrounding such institutions. It also eliminates the need for documentation including standard credit history checks and processing. The costs of processing, documentation and payment delays are often a fraction of what it would cost in other approaches. Most P2P Lending companies do not ask for collateral on lending and offer better rates for borrowers with good prior records. It comes as a dual benefit as an Investor can hope to earn premium return rates on the investment in such companies while a borrower can avoid multiple hassles of traditional borrowing platforms.
P2P Lending companies are already recognised as NBFCs by RBI, thus securing regulatory hurdles for Investors and borrowers. According to an RBI Consultation Paper on Peer to Peer Lending, this sector is well-regulated in only a few countries across the world. Many including China, South Korea and Ecuador are looking for clear definitions for regulation of the platforms. Developed markets like France, and Germany recognised P2P lending firms as Banks, thus adding more regulatory hurdles to Borrowers & Investors. While countries like the US have state-wise regulation of P2P Lending firms where some states may ban the practice while some only allow select investors to deal in such products. India is in a much better position in such a scenario with simpler and unified national-level regulation, thus offering flexibility to P2P lending firms, Investors as well as borrowers. The onus now remains on Investors, Entrepreneurs and the Financial Community as a whole to find the way forward.
(The writer is finance researcher)
