Professional Documents
Culture Documents
B B Chakrabarti
Professor of Finance
Forms of Investor Exposure to Lending
How Does P2P Lending Work?
• P2P lending business model is different from that of banks.
• P2P platforms do not lend their own funds. They act as a
platform to match borrowers who are seeking loans with
investors who purchase notes or securities backed by notes
issued by the P2P platforms.
• Borrowers benefit from a streamlined application process, quick
funding decisions and 24/7 access to the status of their loans.
• Investors benefit from the interest paid by the borrowers net of
fees and charges retained by the P2P platform.
• P2P platforms generate revenue from origination fees charged
to borrowers and from a portion of the interest paid by the
borrowers as servicing fees, as well as additional charges such
as late fees.
P2P Lending vs Bank Lending
Functions of P2P Platform
• Fees are paid to the platform by both the lender as well as the
borrower. The borrowers pay an origination fee (either a flat rate fee
or as a percentage of the loan amount raised) according to their risk
category. The lenders, depending on the terms of the platform, have
to pay an administration fee and an additional fee if they choose to
use any additional service (e.g. legal advice etc.), which the platform
may provide.
• The platform provides the service of collecting loan repayments and
doing preliminary assessment on the borrower’s creditworthiness.
The fees go towards the cost of these services as well as the general
business costs. The platforms do the credit scoring and make a profit
from arrangement fees and not from the spread between lending and
deposit rates as is the case with normal financial intermediation.
• While crowd funding - equity, debt based and fund based- would fall
under the purview of capital markets regulator (SEBI), P2P lending
would fall within the domain of the Bank.
Regulation of P2P Lending