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Peer-to-Peer lending Business: Thriving amid Existing Competition

Peer-to-Peer lending Business: Thriving amid Existing Competition

The peer-to-peer lending business is highly commendable in this highly competitive market. Modern markets in any domain are highly-competitive, and it takes a lot to stand out from the rest, especially for small businesses and startups. MSMEs and entrepreneurs require funds to develop their marketing strategies and introduce new operations continuously.

Despite being a vital component of the global economy, banks often overlook small businesses and MSMEs when lending for business purposes. The whole process of raising funds turns into a tedious task for them. Besides, even if the applicants are lucky enough to pass the requirements, obtaining funds turns into a burdensome and time-consuming process. And it’s not solely about businesses. Individuals whose reputation doesn’t look right through the lens of traditional scoring methods experience similar issues. The peer-to-peer lending business is a solution in such cases.

The problem has especially become acute in light of the global pandemic.  The majority of companies or organizations suffer the lack of funds to pay bills and rent as the main reason for shutting down. Hopefully, a sacred place is never vacant, and the expansion of alternative Lending has changed the lending scenery for good. Such a new approach in loans like Peer-to-peer lending business bridges the financial gap, and now it is in trend the domain of Lending.

About Peer-to-Peer Lending Business

Peer to peer lending business is the process of lending money to individuals or businesses through online lending platforms. The peer-to-peer lending business provides funds to particular individuals or legal entities through specialized online platforms without direct mediation from the bank or various other traditional financial institutions. Such Lending type contains two kinds of primary sorts of deals: secured and unsecured loans, with most unsecured personal loans.

Any individual investor or any financial institution can become a Peer-to-peer lending business and earn interest paid by any individual or company who has borrowed money. Peer to peer platform is taking the role of a banking model and revamping it entirely to create a favorable lending and borrowing climate.

Peer-to-peer platforms function entirely online. Hence lenders can earn a higher interest rate on their investments, and the borrowers can get better rates. The peer-to-peer lending business is also known as “social lending” or “crowd lending.”

How does it Work?

The Peer-to-peer lending business is one of the most comfortable and most cost-efficient methods in the lending domain. It involves elementary steps with no lengthy processes or complications. Any individual or business organization who is looking for a loan goes to Peer-to-peer platforms to borrow money. In the process, once the borrower is approved and listed, individual and institutional lenders can lend money to that borrower. Once the borrower gets funded, he/she starts to make repayments every month. These repayments cover the principal and interest which the lenders receive.

How safe is Peer-to-Peer Lending Business?

Similar to other investment asset classes, the Peer-to-Peer lending business also involves risk. The risk depends on the P2P lending platform and their credit policies, determining the borrowers’ quality. However, the risk can mostly be minimized by following guidelines suggested for regular lenders by concerned authorities.

Following are the most effective methods to reduce risk in peer-to-peer lending business:

  1. Checking for the credit verification process.
  2. Diversify your funds into many borrowers to mitigate the risk.
  3. Do your due diligence before getting into the Peer-to-peer lending business.
  4. Invest through those platforms which assist in the loan recovery process.

The RBI or Reserve Bank of India[1], as of 4th October 2017, published several guidelines to regulate Peer-to-peer Lending platforms to protect the lenders & borrowers’ interest. Peer-to-Peer lending platforms must gain certification as NBFC-P2P to continue operating as peer-to-peer lending businesses. The guidelines ensure that peer-to-peer Lending is no more a risky journey and can be taken up by the firms in the long run.

Advantages

Main advantages of Peer-to-peer lending business include:

  • Better returns. Generally, lenders receive higher returns on invested funds in P2P platforms. This usually happens partly due to competitive rates of Peer-to-peer platforms compared to traditional lending methods as administrative & invoice expenses (personnel costs, office rental, etc.) to create a P2P business is decent enough. Peer-to-peer lending business expenses are relatively low than any method.
  • The facility of Loans for a wide range of borrowers. The peer-to-peer lending business provides more comprehensive access to credit. Following the global financial crisis of 2008 & amidst the Pandemic crisis, banks and traditional lending organizations have become more selective in choosing borrowers. As a result, both individuals & small or medium-sized businesses that do not satisfy modern credit eligibility criteria cannot access credit. Peer-to-peer lending platforms aren’t that strict, and investors may reach a broader range of borrowers in less time.
  • Low default rates. Loan rates for platforms for business and consumer loans are usually around 2-3%.
  • Positive public image. There’s an opinion that Peer-to-Peer lending business is more responsive and has a higher social value than traditional bank lending. Banking methods often use their financial intermediaries’ dominant market position to receive profits without due attention to their customers’ needs and interests.
advantages of Peer-to-peer lending business

How to Choose a Peer-to-Peer Lending Business Platform

The success of any peer-to-peer lending business depends on three principal foundations. Therefore, while choosing a platform, it’s worth asking a potential vendor about the following components that are as follows:

  • Flexibility

First of all, the solution needs to be flexible. There’s no way we can stress this aspect more. A modern Peer-to-peer platform should allow customizations as per various business requirements or changing regulatory frameworks to successfully launch & run a Peer-to-peer lending platform.

  • Automation

A decent solution is the one that teaches a holistic, modular architecture that can automate the Peer-to-Peer lending process in its integrity, starting from the origination of a loan to risk assessment and other collateral management.

  • Integration

Integrations with third-party services for KYC & AML compliance, identity checks, credit bureaus, digital signatures are also necessary for peer-to-peer business.

How is Peer-to-Peer Lending Business better than other Investment Assets?

Peer-to-peer lending business is a new age investment asset that has revolutionized investing in the country. In most areas, it is more popular than banks. Peer to Peer Lending has only risen to prominence in India, virtually in the past 2-3 years. Based on Lending and borrowing’s simple idea, the P2P Lending platform uses cutting-edge technology to connect to borrowers looking for a quick capital injection to lenders seeking to earn high returns. Such has been the surge in investments through the platforms that even the RBI couldn’t help but notice it and started regulating it for a good cause. 

Conclusion

Peer-to-peer lending businesses have become a beautiful part of the financial market, offering authentic investing tools to private individuals & seasoned investors. One of the fundamental reasons for such growth is the credit deficit in the current scenario. Crisis, pandemic, or whatever might be the reason, population and businesses still need to get small loans. At the same time, traditional institutions even decline them as (in banks’ eyes) they do not provide high returns and contain high risks. This new reality offers good prospects for companies in Peer-to-peer lending, both established and startups.

As Indian Lenders Association, we strongly support the Peer-to-peer lending and shall assist the companies willing to get into the nexus of the same. Indian Lenders Association strongly encourages Peer-to-peer lending in India. Those interested in diversifying their funds and are expecting good returns should undoubtedly get associated with this new trend. We shall aid all the curious organizations willing to opt for this. We shall provide the best possible investment opportunity.

Read our article:Fintech Lending in India: Streamlining the Traditional Lending Process