What do you understand by peer-to-peer (P2P) lending? How it can promote the alternative forms of finance? Discuss in the light of recent RBI's regulation stance on P2P lending.

Peer-to-peer lending, also known as social lending, is a mechanism that enables people to borrow and lend money without an official financial institution. Since such lending removes official institutional intermediary, therefore it carries more risk and involves more time, effort than conventional lending systems. However, the good thing about P2P lending is that, for a lender, there are possibilities of higher return, Also those borrowers who could not get loans through conventional financial intermediaries, can get access to finance.
As per RBI notification, peer-to-peer lending platforms will be treated on par with non-banking financial companies (NBFCs). Regulations will ensure credibility and trust into this financial mechanism.
Peer-to-peer lending platforms provide the alternative financial mechanisms specifically, where the formal financial mechanisms are unable to provide financial support. Also, this has the potential to reduce the lending rates due to lower operational costs and enhanced competition with the traditional lending channels. In fact, if it is properly regulated, P2P platforms can do this more effectively and in future banks may consider tie-ups with P2P lenders, since the sector will now function as per RBI regulations.
Because of the lack of regulatory framework growth in this sector has been slow, now with clarity about regulations, the sector is expected to rise soon. The biggest issue is awareness about P2P platforms. Therefore adequate resources should be diverted towards awareness generation.

Question for UPSC Mains:
What do you understand by peer-to-peer (P2P) lending? How it can promote the alternative forms of finance? Discuss in the light of recent RBI's regulation stance on P2P lending. THBL | Live Mint

Published: September 21, 2017 | Modified:June 27, 2019

Comments