Fintech Lawyer Blog – Peer to Peer Lending (Business Models)
Have you ever thought that why a bank would not give you a loan for getting your house repaired, your excursion trip to Maldives or Hawaii? Why the banks do not support you when your credit score is not good?
You would have heard that the bank will give you an umbrella when there is sunshine and shall withdraw it when it rains. The thumb rule for the bank to invest is if it has invested in a project that is secured or not. Banks for various risk factors do not enter into the zone of high risk and high returns. The banking business is more focused around low risk, and medium returns transactions. The interest rates for borrowers and lenders of financial institutions are regulated by monetary policy. The credit reserve ratio declared by the central banks govern the flow of money supply into a particular jurisdiction. What does this situation leave us with? Well, great untapped opportunities for high risk and high returns debt market.
We had personally come across certain investors who specialise in extending loans for purposes or to people to whom banks do not extend loans. The rate of interest in these cases could be as high as 60%. These business models are prevalent in countries other than India such as some countries of old USSR economy, Europe and Africa. In India, money lenders were a community spread across the nation that would engage in such business during British Raj. However, to curtail money lending, the then Government of India, British India introduced money lending prohibition acts. These acts in some states completely prohibited money lending and some states it restricted the rate of interest that a money lender could charge. In some states, they also restricted the assets from which the moneylender could or could not recover. Well, practically, we have not come across any prosecution by an authority of any money lender in recent past. The system, however, still exists informally.
To our understanding, the P2P lending platforms fulfill this need for high risk and high returns in an economy. Further, P2P lending platforms are fulfilling this need in case of individual loans at present. The need for high risk and high returns in the corporate world is fulfilled by private equity and venture capital funds. We have also come across a specific online market place that provides listing of start-ups and matches them with either angel, seed or series one private equity fund.
P2P lending platforms bring borrowers and lenders together on one platform. There is no restriction on purpose for which funds could be raised. There is, however, self-imposed censorship on the rate of interest charged to the borrower by the lender. Most of these loans are unsecured and without any collaterals. There is a trend to collect post-dated cheques for securing the payment as this gives a handle to the lender to initiate criminal proceedings against the borrower. Most of the documents are simple, including a loan agreement. The KYC process is performed in case of borrower and lenders. But, one person cannot be a borrower or a lender on the same P2P platform.
P2P platforms are adopting either of these three business models:
- Marketplace for Borrowers and Lenders;
- Marketplace supported by financial institutions;
- Financial institution utilises the P2P platform for its own customers.
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