P2P Lending and the MSME Sector

Abstract

Over the years, we have witnessed the emergence of several e-commerce business models in the financial domain. One such business model is Peer-to-Peer (P2P) lending, a form of crowdfunding through which money is raised for the disbursement of credit and then gets repaid with interest (Dhawan, 2018). Crowdfunding is a method of funding through money raised from a large group of individuals, usually with the help of a platform, including online platforms that act as intermediaries (RBI, 2016). Thus, P2P Lending is "the use of an online platform that matches lenders with borrowers in order to provide loans that are typically unsecured" according to Dhawan (2018). This article explains Peer-to-Peer (P2P) lending and discusses its benefit and challenges for the MSME (Micro, Small, and Medium Enterprises) sector. A P2P lending platform is a marketplace, matching a set of borrowers directly with the group of investors (or lenders). The platform, in turn, charges a transaction fee for every transaction encountered through it. Individuals register themselves on the P2P platform by providing key information like personal details, professional details, and financial details. The platform then performs due diligence by verifying the information itself for assessing the creditworthiness of the individuals. Thereafter, the platform lists all approved borrowers and lenders who can participate in lending or borrowing on its portal. On P2P lending platforms, lenders can observe borrower loan listings, borrower's personal, professional, and financial information, loan purpose, and a brief description as to why lenders should make the loan offers to them. These details help lenders make an informed decision about making a loan to a borrower. The borrowers receive offers from numerous lenders, and likewise, lenders can also propose lending offers to multiple borrowers, thereby diversifying the default risk (Thanawala, 2020a). When the funding for a loan becomes 100%, the loan can be ready for disbursement, subject to the borrower’s acceptance. Disbursal occurs only after signing of the agreement of loan between borrower and lender. After that, the money is transferred to the borrower's account from the lender for the loan amount, and EMI begins to transfer from the borrower to the lender. According to the RBI, India had 21 P2P Lending companies as of 2018 (RBI, 2018). Some of them are involved in businesses directed at microfinance activities. The main aim of the P2P lending firms is to create a social influence and provide easier access to credit to small entrepreneurs and MSME. Thus, "P2P Lending platforms are largely tech companies registered under the Companies Act and acting as an aggregator for lenders and borrowers thereby, helping create a match between them" (Roy and Lele, 2016).