"Crowd Funding" in general means raising funds of small amounts from a large number of people for the purpose of financing / funding a project or venture or a social cause.
This can be divided into 4 categories:-
A. Social Crowd Funding- Gathering of funds for social or philanthropic purpose
B. Reward Crowd Funding- Gathering of funds where investors receive tangible reward as consideration.
C. Peer to Peer Lending- Online platform wherein lenders and borrowers are matched for unsecured loans. Rate of Interest is determined as per mutual negotiations or as per the platform rule.
D. Equity Crowd Funding- Gathering of funds to fund a business or company against which equity shares of the business / company is issued.
With the advancement in technology and start-up world, financial markets are not well behind the euphoria. P2P lending is a platform wherein borrowers and lenders are matched to fund the requirement. These loans are needed to be paid back along with interest. The interest rate is determined by mutual negotiations or as per the platform rules. There are fees which is needed to be paid by both the borrower and the lender to the platform. Additional fees may be imposed for the service rendered by the platform like legal advice, credit scoring, assessment of credit worthiness etc... The platform earns from the admin fees and the service fees that it charges, unlike in traditional financial institutions the earnings is the spread between deposit rates / cost of funds and lending rates.
In India P2P is in a very nascent stage unlike in other countries where the presence is much large. Countries like Israil & Japan don't allow P2P lending activities while US runs a two level regulatory for this sector (SEC and the State level). Countries like France, Germany Italy requires the platform to acquire banking licence and full disclosure as per the regulations. China is still having an unregulated market, and is the largest in the wold with hundreds of platforms offering diverse services.
P2P lending services depend on technological advancement and are registered under the Company Act. They act as gathering point for both borrowers and lenders and thereby creating a match. Both borrowers and lenders are needed to register themselves in the platform website, post which due-diligence is initiated by the platform. If found acceptable they can carry on the process of lending or borrowing. A method of reverse auction is followed wherein lenders bid for the borrower's proposal and the borrower has the right but not the obligation to accept or reject an offer. Several other enhanced services are also provided by the platform. Credit scoring, risk profiling, recovery etc... Documentation is facilitated by the platform and transfer of funds are done via bank only (to avoid money laundering). Post dated cheques are collected from the borrower in the name of lender by the platform. Since all transactions are via banking, its deemed that KYC compliance is already done by banks.
Why to regulate this ?
The dealings are on money and to regulate it would discount the potential disruption it can bring to the traditional financial sector (Banks or NBFC). Since the process is having low operational cost it would attract other players soon and create a competitive scenario. To help in sustainable and reasonable growth regulations must be put into place. Regulations would help to offset the risk to some extend whereby lenders with low awareness about the risk may engage in extending funds.
Disruptions in financial markets are due to the innovative instruments brought in by technological changes. A more proactive regulation and risk mitigation activity with regards to the pace of developments must be kept to ensure sound fundamental strength and sustainability.
This can be divided into 4 categories:-
A. Social Crowd Funding- Gathering of funds for social or philanthropic purpose
B. Reward Crowd Funding- Gathering of funds where investors receive tangible reward as consideration.
C. Peer to Peer Lending- Online platform wherein lenders and borrowers are matched for unsecured loans. Rate of Interest is determined as per mutual negotiations or as per the platform rule.
D. Equity Crowd Funding- Gathering of funds to fund a business or company against which equity shares of the business / company is issued.
With the advancement in technology and start-up world, financial markets are not well behind the euphoria. P2P lending is a platform wherein borrowers and lenders are matched to fund the requirement. These loans are needed to be paid back along with interest. The interest rate is determined by mutual negotiations or as per the platform rules. There are fees which is needed to be paid by both the borrower and the lender to the platform. Additional fees may be imposed for the service rendered by the platform like legal advice, credit scoring, assessment of credit worthiness etc... The platform earns from the admin fees and the service fees that it charges, unlike in traditional financial institutions the earnings is the spread between deposit rates / cost of funds and lending rates.
In India P2P is in a very nascent stage unlike in other countries where the presence is much large. Countries like Israil & Japan don't allow P2P lending activities while US runs a two level regulatory for this sector (SEC and the State level). Countries like France, Germany Italy requires the platform to acquire banking licence and full disclosure as per the regulations. China is still having an unregulated market, and is the largest in the wold with hundreds of platforms offering diverse services.
P2P lending services depend on technological advancement and are registered under the Company Act. They act as gathering point for both borrowers and lenders and thereby creating a match. Both borrowers and lenders are needed to register themselves in the platform website, post which due-diligence is initiated by the platform. If found acceptable they can carry on the process of lending or borrowing. A method of reverse auction is followed wherein lenders bid for the borrower's proposal and the borrower has the right but not the obligation to accept or reject an offer. Several other enhanced services are also provided by the platform. Credit scoring, risk profiling, recovery etc... Documentation is facilitated by the platform and transfer of funds are done via bank only (to avoid money laundering). Post dated cheques are collected from the borrower in the name of lender by the platform. Since all transactions are via banking, its deemed that KYC compliance is already done by banks.
Why to regulate this ?
The dealings are on money and to regulate it would discount the potential disruption it can bring to the traditional financial sector (Banks or NBFC). Since the process is having low operational cost it would attract other players soon and create a competitive scenario. To help in sustainable and reasonable growth regulations must be put into place. Regulations would help to offset the risk to some extend whereby lenders with low awareness about the risk may engage in extending funds.
Disruptions in financial markets are due to the innovative instruments brought in by technological changes. A more proactive regulation and risk mitigation activity with regards to the pace of developments must be kept to ensure sound fundamental strength and sustainability.
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