Peer to peer lending: Old wine in a new bottle..

If one gets an idea to write on, he/she should write/blog about it immediately. Else, someone will write about it soon. This is one such article.

There has been a lot of noise about this word P2P  (peer to peer) in financial world recently. What was essentially a term used in tech industry for sharing music, movies etc pioneered by likes of Napster, has come to hit the world of banking/finance.

What does P2P banking mean? Like in tech world, where a person creates a music file and shares it with others via a tech platform, same is the case with P2P banking as well. Some person with funds lends it to others via a tech platform as well. Important to note the role of individuals here. Unlike a music firm or a banking company this time the distribution of music/funds done by individuals. Just like tech made it easier for people to share music, same tech helping to make it easier for people to lend funds.

Sounds exciting? Yes it does but we know what happened with all these P2P music/video platforms. Eventually, the big firms lobbied to throw these guys out of business. One could expect banks to retaliate in similar fashion as well in future.

But the point is even deeper than this. P2P banking is hardly anything new. It is perhaps the oldest form of banking when people lent funds to others as there were hardly any organised form like a bank of today. In India, there were several such forms of P2P banking which British together called as indigenous banks. Within these indigenous banks, there were nidhis, chit funds etc which were nothing but P2P forms of lending. Group of persons came together to lend funds to each other minus all the tech of today. Infact, the tech then was trust, social networks, peer pressure etc.

This is what Mr Rajwade also says in this article:

The business media has been full of reports and comments on peer-to-peer lending (P2P) in recent weeks, particularly after the publication of a discussion paper by the Reserve Bank of India (RBI) last month. In a way, there is nothing new about the concept: in principle, thebhishis () of housewives in most cooperative housing societies in Mumbai are a form of P2P; so are the age-old “chit funds”. At a different level, public issues of corporate bonds are also a form of lending by the individual saver to the issuer of the bond – and so are money market and bond funds. The basic feature of all these arrangements is that the saver directly takes the credit risk on the borrower, without the intermediation of any bank or finance company. The securitisation of loans by banks also means the same thing: to be sure, there is, in theory, an intermediary, namely a nominally capitalised entity (special purpose vehicle or SPV) that buys bank debts and issues securities backed by these assets for sale to investors.

The main distinguishing feature of P2P is that the loan amounts are relatively small, say, up to Rs 1 lakh (but so is the case in bhishis and chit funds), and the transaction is arranged on an electronic platform managed by the promoter, who gets a fee for the service. The numbers I have read for the interest and the fee are of the order of 20 per cent per annum and five per cent of the loan amount, respectively. Clearly, not many businesses would be able to afford P2P – unless their business margins are high enough, or they are borrowing at an even higher rate. Or would the loans be for consumption expenses like marriages? They may also overlap with microfinance institutions (MFI).

MFIs remind me of how we seem to be prone to accept a new model of financial intermediation without weighing the risks: remember the craze for leasing companies at one time with every Rajaram, Sitaram and Tukaram promoting a leasing company? Few survive today, and my memory is that even the most successful one (based in Chennai) is in difficulties. There has also been a shake-out in the sector.

Actually one should always be weary when media and policymakers try and project something in banking/finance as a new thing. It is highly likely it is old wine in new bottle. Finance and trade are two areas which are as old as it can get and in all likelihood people in the past would have looked at most variants to make these two things work.

P2P banking is hardly anything new. Given there were numerous fly by night P2P operators, eventually joint stock banking form developed where it was more difficult for banks to run away. It is really fascinating to note how historical records point that development of transport facilities made it riskier for chit funds. WHy? Now the operator could easily run away to other places. So, you needed a more stickier form of financing like a bank which could not run away as easily. There is a reason why earlier banks actually looked like fortresses indicating that money would be protected and it would not run away overnight.

With a new technology personalising things now, P2P banking has again emerged from history. It was not dead as chit funds, nidhis etc survive till date. Just that they lost out their flavor over a period of time. So it not a case of something reemerging from death but from slumber..

 

2 Responses to “Peer to peer lending: Old wine in a new bottle..”

  1. Daily SG: 13 May 2016 | The Singapore Daily Says:

    […] Mostly Economics: Peer to peer lending: Old wine in a new bottle.. – Money Smart Blog: If You Bought a BTO 5-7 Years Ago, Now is the Perfect Time to Upgrade […]

  2. Linkfest - Kairos Capital Says:

    […] P2P lending: Old wine in a new bottle (Mostly Economics) […]

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