The burgeoning equity crowdfunding and P2P lending space in India

The crowdfunding industry has witnessed a massive growth globally. According to an industry report published by Massolution, the estimated fundraising volume through crowdfunding globally in 2015 was $34 billion.

The industry has witnessed exponential growth from a mere $2.7 billion in 2012. Source: Crowdexpert.com

When we talk about crowdfunding we generally refer to reward-based, donation-based and equity crowdfunding, but when you look at breakdown of the total funding volume published in the report it appears that P2P lending contributes to more than 70 percent of the total funding volume.

The breakdown of the total funding volume is:

Peer-to-peer (P2P) lending: $25 billion

Reward and donation crowdfunding: $5.5 billion

Equity crowdfunding: $2.5 billion

Source: Crowdexpert.com

The P2P lending model contributes to more than 70 percent of the total crowdfunding funding volume.

The financial sector is not immune to technology disruptions and fintech appears to be a very hot sector in India so far this year. Most of it has been related to payments, wallets, online lending marketplaces. Crowdfunding industry is still at nascent stage and seems insignificant but its potential cannot be ignored.

Donation and rewards-based crowdfunding platforms are growing, and some of them have also received institutional funding. In the current P2P crowdfunding model scenario in India, existing companies are involved in micro-finance activities for creating social impact, by providing easier access of credit to small entrepreneurs. P2P lending model hold great potential to cause disruption in the banking sector and the global growth statistics support this analogy. It also estimated that as many as 30 P2P lending startups exist in India and most of them have come up in the past year alone.

In 2015 alone, around 20 new online P2P lending companies were launched in India. At present, there are around 30 startups in the P2P lending business in India

Source: Livemint & Economic Times

Seeing all this, the government is alarmed and RBI has proposed to register P2P lending platforms as non-banking financial companies (NBFCs).

According to the discussion paper published by RBI the proposed regulation includes:

Permitted activity

• The role of the platform would be limited to bringing the borrower and lender together without the lending and borrowing getting reflected on its balance sheet.
• The platforms will be prohibited from giving any assured return either directly or indirectly.
• It will also be mandated that funds will have to necessarily move directly from the lender’s bank account to the borrower’s bank account to obviate the threat of money laundering.
• The guidelines would also prohibit the platforms being used for any cross-border transaction in view of FEMA provisions relating to transactions between residents and non-residents.

Prudent requirements:

• The companies must have a minimum capital of Rs 2 crore.
• The platforms may have to adhere to a leverage ratio so that they do not expand indiscriminately.
• Considering lenders may include uninformed individuals, prudential limits on maximum contribution by a lender to a borrower/segment of activity could also be specified.

Governance requirements

• A reasonable proportion of board members having financial sector background could be suggested.
• The guidelines may also require the P2P lender to have a brick-and-mortar place of business in India.

Customer interface

• The current regulations applicable to other NBFCs will be made applicable to the P2P platforms in regard to loan recovery practice.
• The platforms will have to guarantee confidentiality of customer data.

Regulations can boost credibility and increase participation of investors, customers and entrepreneurs in this space. 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. SEBI has also published a discussion paper on equity based crowdfunding earlier in 2014. As a crowdfunding enthusiast I am excited about the space and look forward to updates by regulators on both crowdfunding models.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)