Need a loan? Go online

Amid a liquidity crunch in banking, a relatively new practice of lending and borrowing without intermediaries like banks and financial institutions is emerging through online sharing of money, making it easier for people to get loans.

According to a study by market intelligence and data analysis services provider Grail Research, peer-to-peer lending -- which refers to an individual or a group lending money to a person in need without the role of any intermediary -- is fast emerging and may reduce dependence on banks.

The market size of the country's informal lending market is estimated to be $ 90-100 billion, with rural areas accounting for a bulk of the market. Of this, just 30-35 per cent is supposed to be managed through friends and family networks, including the emerging new platform of 'peer-to-peer' lending. This new form of loan is more popular among people who do not have easy access to bank loans and belong to low income groups.

"P2P lending is one of Web 2.0's less appreciated killer apps. By eliminating intermediaries such as banks, it creates better outcomes for both borrowers and lenders. We expect it to be a key threat for traditional lenders such as banks in the long term," Grail Research country head Amit Kumar said.

While the lack of a fully functional credit bureau inhibits its application in its traditional form, it is also leading to innovation such as the use of micro finance institutions. "We consider its potential impact to be on par with other innovative models such as ITC's e-choupal," Kumar added.

Unlike traditional banks, which are governed by the Reserve Bank of India's regulations, P2P lending is more independent and flexible on various points. "In the P2P system, the rate of interest at which one would take loans is negotiable. Unlike regulated banks' practices, paper work and credit checks of borrowers are not so important here, which ultimately saves time," Kumar said.

These firms mainly target poorer segments as they do not have access to formal banking. Moreover, a host of micro-credit institutions operating in India are unable to meet the entire micro-credit demands of the country.

Traditionally, people prefer banks and other similar institutions as they are considered more reliable than lesser-known financial firms. However, a number of P2P lending firms, like dhanaX, Range De and GlobeFunder, have emerged in recent times. But they are in the initial stages and need protection and support from the government for accelerated growth, the Grail Research study said.

The Internet plays a major role in the fledgling industry as P2P lending through portals of such companies involves online sharing of money between users. "Borrowers put up their profiles and make requests for loans on the portals, which the lenders can view. The entire process helps the borrower and the lender gets interest rates that are acceptable to both parties," Kumar said.

P2P companies earn revenues through commissions, both from the lender and the borrower or agent, for arranging the servicing the loan.

P2P lending firm dhanaX co-founder Siva Prasad Cotipalli said, "dhanaX is targeting borrowers with an income between Rs 60,000 and 1,50,000 per annum as there are huge opportunities in the Indian credit market with an unmet credit requirement of nearly Rs 2,00,000 crore (Rs 2,000 billion)."