An old Chinese adage goes “the color of the cat does not matter as long as it catches mice.” Heavy losses and fines faced by “big cat” commercial banks following the 2008-09 financial crisis have led to significant changes in commercial lending and loan financing globally. Notable changes in recent years include the following:
Fearing bad loans, these big cats have become more circumspect and strict about loan disbursements.
This has increased frustration among small borrowers, in particular those who are hungry to finance their business growth
Time-consuming and lengthy loan-financing procedures have called for another set of disruptions in the market.
These circumstances have given rise to the disruptors: “small cats” assisting peer-to-peer (P2P) lending.
Disruption led by China
P2P lending involves loan or debt financing to businesses using an online platform that matches lenders directly with borrowers. It offers efficient procedures, quick lending decisions and better interest rates for both borrowers and lenders. It essentially bypasses banks by using websites to connect lenders with borrowers. Lenders earn more for their cash and borrowers pay less than they would to a typical bank.
The global P2P market will be worth USD898 billion by 2024, up from USD26 billion in 2015, according to estimates. The market is expected to rise at a CAGR of 48.2% between 2016 and 2024. Morgan Stanley estimates that such a lending marketplace could be worth USD150 billion to USD490 billion globally by 2020. The estimates may vary, but analysts are unanimous about growth.
China has the largest and the most dynamic P2P lending market globally, with more than 4,000 providers. China’s liberal attitude toward internet-based lending has contributed to the mushrooming of such platforms. While the market is at its infancy in Europe and the US, it is all set for high growth, albeit under stricter regulatory controls.
Challenges and Risks
The business model does not go without risks. P2P funding does not offer lenders any protection if the borrowing company goes bust or loans are not repaid. Managing frauds and malpractices is another challenge. While P2P platforms face the risk of defaults or borrowers turning to banks, growth prospects remain strong. A well-managed and transparent P2P platform offers a great opportunity as an alternate avenue for loan providers and borrowers.
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