Citizens' Issues
P-2-P Model of lending
Peer-to-peer lending is the next big thing in the financial intermediation space
 
Technology is driving the way the world is functioning, whether it is socialising on virtual platforms, finding love, to buying or selling on a virtual marketplace or financial intermediation. And now technology is all set to chip away at certain segments of banlking as well. One such idea is the online market place for financial intermediation where the borrowers and lenders come together to transact. Lending Club is one of the largest of such virtual marketplaces existing today and in this article, we will be discussing briefly on how the business operates. It is, what is called, a peer-to-peer (P2P) model. 
 
Lending Club, was established in 2007 with the intent to make credit more accessible and is currently the world’s largest P-2-P platform. The platform has over two billion borrowers accessing finance from lenders across globe. The platform facilitated over $7.6 billion of loan in a year, which though is probably 1% of lending undertaken by HSBC in a year, but the sheer volumes indicate that the lenders and borrowers are moving towards dispelling the need for physical presence of the financial institution to facilitate lending relationships.  
 
Lending Model
 
The Lending Club works through a technological platform which intermediates between the borrowers and lenders i.e. it is a market place, where borrowers raise loans from lenders without a physical interface.
 
Lending is intermediated by the platform in the following way:
 
a. The borrowers raise a requisition on the platform for funding requirement. 
b. Lending Club then evaluates the credentials of the borrower and assigns a credit score, grades the borrower for determining the interest rates chargeable to the borrower.
c. Once the borrower’s application is approved, the application is made open for the lenders to express interest in lending to the borrower. 
d. Once lenders’ commitment is received against the loan amount requested by the borrower, Lending Club approaches the bank empanelled with the platform to disburse the amount to the borrower. 
e. Thereafter, Lending Club acquires the loan from the originating bank from the proceeds received from the lenders. 
f. The lenders are issued tradable notes/ certificates representing the exposure of the lender against the borrower.
 
The dynamics of lending through the platform are explained with the diagram below:
 
Lending club, P2P, P2p Lending
Essentials of the platform
 
While the model seems simple to execute, there are key essentials to the platform functioning and are as follows:
 
a. The platform does not invest in any of the borrower accounts. This is to ensure that there is no conflict of interest in any of the borrower accounts that are evaluated for the lenders to take a bid on the exposure;
b. Lending Club only entertains borrower application which meets a requisite FICO score threshold. This is to ensure that too granular loans are not entertained on the platform.
c. Most loans that are open to all lenders to bid on, are standardised loans and run under the standard loan program. 
i. The standard loan programs are of tenure between 3-5 years. 
d. Unconventional loans are not hosted on the platform for all investors. This is to ensure that the general investors who may not have the wherewithal to underwrite a non-standard/ unconventional loan do not take an exposure on such loans merely depending on the scoring/ grading provided by the platform. 
i. The platform calls these loans as custom loan programs and is hosted only for qualified investors only.
ii. The custom program loans include small business loans, super prime consumer loans, education and patient finance loans and personal loans that do not meet the requirements of standard program loans.
e. The model adopted by Lending Club is nothing but securitisation, where the lenders are holding certificates/ notes representing interest in a loan originated by a bank. 
f. Lending Club also indemnifies the lenders against the basic underwriting that it undertakes for any borrower account. This is most critical for a platform to provide considering the lenders are depending on the scoring/ grading offered by the platform, while making a bid on a particular borrower or loan amount. 
g. The repayments from the borrower accounts are not commingled. There are separate bank accounts maintained for inflow and outflow of funds from the borrowers. This is necessary to ensure that the platform is not seen as a vehicle for pooling in of funds.
 
Each of these essential features are critical for any platform to gather the scale it desires and without which the entire purpose of a virtual platform gets defeated.
 
How does the platform earn?
 
The platform earns by way of: 
 
i. transaction fees at the time of origination of loans; 
ii. earns servicing fees for servicing the loans on an on-going basis; and
iii. earns management fees for managing the borrower accounts. 
 
The transaction fees is payable by the bank to the platform. The servicing fees and management fees is paid by the lenders and the borrowers respectively on the platform. 
 
The transaction fee ranges from 1% to 6% of the initial principal amount of a loan. The servicing fee compensates for the costs that the company incurs in servicing the related loan, including managing payments from borrowers, payments to investors and maintaining investor’s account portfolios and may be around 1% of the amount received from the borrowers.
 
Secondary market facilitation
 
One of the key aspects of the platform is to originate the loans; the other key essential to the platform is facilitating liquidity on the investments. 
 
Issuance of notes
 
The lenders invest in the loans by way of notes/ certificates acknowledging their exposure on a borrower account and the extent of exposure in the borrower’s loan. The platform facilitates buying and selling of such notes to ensure that the lenders have the desired liquidity to exit or acquire exposure in the loan/ borrower any time during the subsistence of the loan. This however is done directly through the platform. However, the buying and selling of the certificates is done through the subsidiary of Lending Club. 
 
Notes are issued both under the Standard Loan Program and under the Custom Loan Program. Typically the issuance, sale and purchase of the notes/ certificates are guided by the investment agreement entered by the lender/ investor with the platform at the time of listing itself on the platform. 
 
Whole loan purchase
 
Certain institutions such as banks and financial institutions seek to purchase the entire loan. To meet this requirement the platform sells the entire loan to these investors. In connection with these sales, the investors own the interest, title and rights on these loans. The platform establishes the investors account and also determines any limitation on the amount of investment that can be made.
 
Identifying risks of running the platform
 
The virtual market place for financial intermediation is certainly the thing for the future. However the model is susceptible to several risks. From scalability of the model, to tracking various borrowers and lenders on boarding the platforms to managing several accounts – the risks factors are humungous. 
 
Some of the risks factors critical to any P2P platform are as below:
 
a. No peers or history available to rely on. Considering the fact that P2P is an innovation and by product of technological advancements, there are no precedents to learn from or rely upon for doing business. Lending Club and the peers are setting up business models to be emulated by the subsequent entrants in the market.  
b. The larger the number of borrowers and lenders on platform, the larger is the success of the platform. Hence, the success of the platform is dependent on number of borrowers and lenders using the platform. 
c. For platforms following the Lending Club model, empanelment with banks and appropriate documentation will be a constant challenge and risk for the platform. 
d. Data privacy is of utmost significance. The information provided by the borrowers and the lenders needs to be well protected by the platform. 
e. Simplicity of the product offering and regular functioning of the platform are also risks that the platform needs to tackle. 
 
(Nidhi Bothra is executive vice president at Vinod Kothari Consultants Pvt Ltd. Kanishka Jain also works at the same firm)
 

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Nifty, Sensex may put in a weak bounce – Thursday closing report
Nifty continues to remain weak, even though it may put in an oversold bounce later on Friday
 
We had mentioned in Wednesday’s closing report that Nifty, Sensex rallies may be short-lived and that Nifty may be headed below 7,700. The Indian stock markets suffered a sharp correction due to negative news from China and the major indices fell by over 2% from Wednesday’s close. The trends of the major indices during Thursday’s trading are given in the table below:
 
 
Panic selling triggered by a plunge in Chinese markets, coupled with rising geo-political tensions and upcoming US macro-economic data, dented Indian equity markets on Thursday. This led to the S & P BSE Sensex receding close to its 52-week low on a closing basis. The bellwether indices opened on a negative note following a rout in the Asian markets which was triggered by accelerated devaluation of the Chinese yuan, disappointing domestic macro-data and global uncertainties. Commodity prices, too, plunged as the economy of the world's largest consumer namely China struggled. The benchmark Shanghai Composite Index declined 7% within just 29 minutes, which led to a halt in trading, as the circuit breaker mechanism was triggered. The Chinese markets' fall impacted other global bellwethers, including the Japanese and Australian indices, which reacted negatively.
 
A weak rupee and increase in selling activity by foreign portfolio investors (FPIs) also subdued sentiment. According to data with stock exchanges, FPIs had divested Rs242.48 crore on Wednesday. Market observers pointed out that volumes continued to rise in the sell-off, affirming the weak sentiment. Geo-political tensions in the Middle East and North Korea testing a thermo-nuclear device on Wednesday eroded investors' confidence. Besides, caution prevailed over the upcoming domestic macro-data on industrial output, retail inflation and the third-quarter earnings results which start coming in from January 12. The markets seemed to have ignored the positives, especially the release of latest FOMC (Federal Open Market Committee) meeting minutes which indicated that the US Fed might delay another round of rate hike.
 
The S&P BSE market breadth favoured the bears -- with 2,189 declines and 636 advances. Sector-wise, automobile, capital goods, banking, healthcare and oil and gas indices stocks came under selling pressure.
 
A minimum dividend of 30%, declaration of special dividend and issue of bonus shares are the new guidelines from the central government as the owner for central public sector enterprises (CPSE). The department of economic affairs under the union ministry of finance in its office memorandum on 5 January 2016, said as a majority owner of CPSEs, the central government has decided on the new dividend policy. According to the new policy, a CPSE will declare an annual dividend of 30% of profit after tax (PAT) or 30% percent of the central government's equity whichever is higher; declaration of special dividend as a return for its equity investments; and issue of bonus shares by companies having large cash reserves. According to the department, the companies will have to look at market borrowings for capital investments so as to leverage the favourable debt-equity ratio. The economic affairs department also said market borrowing for capex would enforce more professionalism in the CPSEs. The new dividend policy seeks to increase the dividend income for the central government from the earlier rates of 20% of PAT or 20% of equity whichever is higher.
 
The government is mulling selling part of its stake in the nation's third-biggest private sector lender, Axis Bank, Newschannel reported on Thursday. The government is considering the sale to meet its asset sales target, Newschannel tweeted its newswire report which cited unnamed sources. At the current market price, the government's about 11.6% stake is worth around $1.8 billion. Axis Bank shares closed at Rs409.35, down 4.98% on the BSE.
 
Nearly 340,000 bank employees across the country will strike work on January 8 to protest the implementation of the new Career Progression Scheme (CPS), a leader of the All India Bank Employees' Association (AIBEA) said here on Thursday. He said the strike will be in protest against the violation of the bilateral settlement by five associate banks of the State Bank of India (SBI), namely State Bank of Mysore, State Bank of Patiala, State Bank of Hyderabad, State Bank of Bikaner and Jaipur and State Bank of Travancore. 
 
The World Bank has cut the global growth forecast for 2016 to 2.9%, saying that weak growth among major emerging markets will weigh on the global scenario during the year. In its Global Economic Prospects Report issued on Wednesday, the Washington-based institution expected the world economy to grow 2.9% in 2016, 0.4% lower than the bank's forecast in June 2015, but higher than the estimated 2.4% growth in 2015, Xinhua news agency reported. Developing economies are forecast to expand by 4.8% in 2016, less than expected earlier but up from a post-crisis low of 4.3%  in the year just ended; advanced economies are expected to grow 2.1% this year, also lower than its June forest but up from the estimated 1.6% increase in 2015. 
 
"The January Global Economic Prospects tells us that if 2015 was a disappointing year for the world economy, 2016 is the risky year," said Kaushik Basu, World Bank Group vice president and chief economist, at a media briefing.  "The global economy, in particular the emerging economies could hit a road bump." Downside risks, including slower growth, financial stress around the US Federal Reserve tightening cycle, weak commodities prices, and heightened geopolitical tensions, have become increasingly centred on emerging and developing countries, said the report.
 
The emerging economies seem to be coming apart, with Brazil and Russia expected to remain in recession in 2016, while China and India forecasted to grow around 7% China is forecasted to grow 6.7% in 2016 and 6.5% in 2017, lower than the estimated 6.9% growth in 2015. In 2016, the global growth, the emerging market growth in particular, will depend on continued momentum in high income countries, the stabilisation of commodity prices, and China's gradual transition toward a more consumption and services-based growth model.
 
The central parity rate of the Chinese currency, the renminbi or yuan, depreciated to its weakest point in nearly five years, new data showed on Thursday. The yuan's central parity rate lost 332 basis points to 6.5646 against the US dollar on Thursday, the lowest level since March 18, 2011, data from the China Foreign Exchange Trading System (CFETS) showed, reports Xinhua. As of the end of 2015, the CFETS exchange rate composite index, which measures the yuan's strength relative to a basket of 13 foreign currencies, stood at 100.94, up 0.94% from the end of previous year. In China's spot foreign exchange market, the yuan is allowed to rise or fall by 2% from the central parity rate each trading day. The central parity rate of the yuan against the US dollar is based on a weighted average of prices offered by market makers before the opening of the interbank market each business day.
 
The US stocks suffered big losses on Wednesday as rising geopolitical tensions and sinking oil prices weighed on investor sentiment. The Dow Jones Industrial Average slumped 252.15 points, or 1.47%, to 16,906.51. The S&P 500 dropped 26.45 points, or 1.31%, to 1,990.26. The Nasdaq Composite Index lost 55.67 points, or 1.14%, to 4,835.77. Wall Street was nervous after the North Korea announced it successfully carried out its first hydrogen bomb test Wednesday. Over the weekend, Saudi Arabia cut off diplomatic ties with Iran after angry protesters stormed its embassy in Tehran, the capital of Iran, to protest against Saudi's execution of prominent Shiite cleric Sheikh Nimr Baqir al-Nimr. Analysts said the heightened geopolitical tensions sent traders scurrying from stocks into safe haven assets. Also, oil prices hit their lowest level in more than 11 years on Wednesday as the US crude output of last week increased unexpectedly, which in turn dampened market sentiment. Dragged by plummeting oil prices, the energy sector, the biggest laggard among the S&P 500's ten sectors, slumped 3.62% on Wednesday.
 
The top gainers and top losers of the indices are given in the table below:
 
 
The closing values of the major Asian indices are given in the table below:
 

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Why BCCI needs to come under RTI
The Report of Justice Lodha Panel on cricket reforms, which was made public, last week, has recommended the Board of Cricket Control of India -BCCI to come under RTI. Here are the reasons
 
Besides a string of recommendations, to the Supreme Court, for cricket reforms in India, the three-member panel led by Justice RM Lodha has also suggested to the legislature to consider bringing the Board of Cricket Control of India (BCCI) under the ambit of the Right to Information (RTI) Act and to ensure transparency in all its functions and dealings of money. 
 
The Report states, “The Right to Information Act, 2005 (RTI Act) enacts that public authorities shall make known the particulars of the facilities available to citizens. Having regard to the emphasis laid by the Supreme Court that BCCI discharges public functions and also the Court’s reference to indirect approval of the Central and State Governments in activities, which has created a monopoly in the hands of the BCCI over cricket, the Committee feels that the people of the country have a right to know details about the BCCI’s functions and activities. It is therefore recommended that the legislature must seriously consider bringing BCCI within the purview of the RTI Act.”
 
However, presently the issue of the BCCI coming under the RTI Act is sub-judice. Therefore, the Report mentions “While the issue of the BCCI being amenable to the RTI Act is sub-judice before the High Court of Madras in WP No20229/2013, many respondents who appeared and interacted with the Committee were of the view that BCCI’s activities must come under the RTI Act.”
 
The Lodha Panel Report has put immense importance to “transparency” by the BCCI. Besides the RTI Act, it has recommended that the website of BCCI be transparent (information on the website is also an integral part of the RTI Act) about the tenders and bids, on annual reports, balance sheets and resolutions and links to online ticket facilities.
 
The Lodha Panel Report has also has recommended the regional bodies of BCCI to put most of the information in public domain, observing corruption, financial irregularities, conflict of interest, partiality in selection of cricketers and so on.
 
Here’s what it has proposed for the BCCI and its regional offices:
 
“…the Committee proposes that clear principles of transparency be laid down, and the BCCI website and office will carry all rules, regulations and office orders of the BCCI, the constitution of the various committees, their resolutions, the expenditures under various heads, the reports of the Ombudsman/ Auditor/ Electoral Officer/ Ethics Officer and the annual reports and balance sheets.” 
 
“In addition, norms and procedures shall be laid down for the engagement of service professionals and contractors, and there shall be full transparency of all tenders floated and bids invited by or on behalf of the BCC.”
 
“….The website shall also have links to the various stadia with seating capacities and transparent direct ticketing facilities.”
 
Constitution & Functioning of Members Apart from the BCCI 
The majority of the regional members of the BCCI are societies registered either under the Societies Registration Act, 1860 or the respective State acts. A handful have recently been registered as companies under the provisions of the Companies Act, 1956 (Haryana, Punjab, Delhi, Himachal Pradesh, Uttar Pradesh and Maharashtra). The Cricket Club of India (CCI) and the National Cricket Club (NCC) are also public companies limited by guarantee. Thus, all existing Members of the BCCI have different structures. Uniformity in the constitution and functioning of the Member Associations is necessary for the proper governance of the game. The different structures in Member Associations have brought about much disquiet in Indian cricket. 
 
Compliance: Companies and Societies have fundamentally different constitutions and objects, apart from different reporting and compliance mechanisms. While the associations that are companies have been registered as not-for-profit (earlier under Section 25 of the Companies Act, 1956 and now under Section 8 of the Companies Act, 2013), there is little to show that there has been compliance as legally mandated. As far as Associations registered as societies are concerned, the relevant statutes provide for a comparatively lesser degree of transparency.
 
Expenditure & Infrastructure: One of the major criticisms of the functioning of the BCCI has been the fact that there has been no accountability by Member Associations of the grants given to them by the BCCI for the ‘development of cricket’. No detailed account are maintained, no oversight or audit is carried out, and on the rare occasion where a particular Association has been found wanting, there is no follow up action. The funds are allegedly utilised for winning votes by apportioning amounts to constituents (clubs, and district associations) and quite frequently being siphoned away without any accountability.
 
State infrastructure remains poorly developed with very few turf wickets or cricket grounds outside of the existing stadium. The stadia (even new ones) do not provide basic facilities to the public, nor offer food and water at a reasonable price or of an acceptable quality. More importantly, the lack of hygienic toilets and access to the differently-abled discourage many patrons. The ad-hoc and irregular manner of creating stands or refurbishing the premises without proper municipal permissions has led to a standoff with at least two state governments (Delhi and Tamil Nadu). The eventual victim is, of course, the cricket fan who loses out on a chance to watch a home match.
 
Lack of professionalism: There is no distinction between governance and management in the Member Associations, and no steps have been taken to create modern and professional systems to take cricket administration forward. The accounting systems for example, are uniformly capable of alterations without a trace, thereby opening up the possibility of abuse. There is no incentive to create revenue streams, and it is time to rouse the Member Associations from their comfortable couches where they rest upon BCCI’s largesse.
 
Dual posts: Strangely, while conflict of interest issues have been at the heart of recent controversies, virtually all office bearers of the BCCI continue to be office bearers in their respective State Associations at the same time. Presidents and Secretaries of State Associations are to discharge functions with the primary interest of the State in mind, but as BCCI office bearers, these interests would have to be subordinated to that of national interest. Often, with powers centred on an office bearer, that individual has been found to appoint his State associates to critical posts in the BCCI, thereby creating an imbalance.
 
Interference in selection: Over the last two decades, there have been disturbing accounts of some of the country’s leading players being forced to migrate and play for other States because the home state’s administration looks to suppress their avenues and brook no independent action by the Selection Committees. Large amounts of influence, in all possible unsavoury forms have been utilised in order to have one player or other selected, with merit being wholly ignored. The problem is so deep-rooted, that many feel that the States are not inducting or fielding their best available talent.
 
Transparency: While quite a few associations have websites, the relevant and critical details including their constitution, bye-laws, accounts, expenditure, ethics guidelines and player statistics are rarely available or up to date. There are many others who do not even have or maintain websites, nor do their offices respond to requests from journalists and others for sharing such material.
 
Information: Technology solutions, as referred to earlier, would be useful to ensure that such transparency is achieved. Each State Association will necessarily have a website that carries the following minimum details:

a. The Constitution, Memorandum of Association and Rules & Regulations, Bye-Laws and Office Orders and directions that govern the functioning of the Association, its Committees, the Ombudsman and the Ethics Officer.

b. The list of Members of the Association as well as those who are defaulters.

c. The annual accounts & audited balance sheets and head-wise income and expenditure details. 

d. Details of male, female and differently abled players representing the State at all age groups with their names, ages and detailed playing statistics.

e. Advertisements and invitations for tenders when the Association is seeking supply of any goods or services (exceeding a minimum prescribed value), or notices regarding recruitment, as also the detailed process for awarding such contracts or making such recruitments.  

f. Details of all goals and milestones for developing cricket in the State along with timelines and the measures undertaken to achieve each of them.

g. Details of all office bearers and other managerial staff (including CEO, COO, CFO, etc.)

h. Details of directives from the BCCI and their compliances. These websites will have to be maintained and updated at least on a quarterly basis. All the above information will have to be maintained at the registered office of the State Association and when sought, the same shall be shared with the applicant on the payment of a reasonable fee, as may be prescribed by the Association. 

 
Let us see how much of the Lodha Panel’s recommendations are implemented, considering the heavy money and political clout that the BCCI has come to be.
 
(Vinita Deshmukh is consulting editor of Moneylife, and also convener of the Pune Metro Jagruti Abhiyaan. She is the recipient of prestigious awards like the Statesman Award for Rural Reporting which she won twice in 1998 and 2005 and the Chameli Devi Jain award for outstanding media person for her investigation series on Dow Chemicals. She co-authored the book "To The Last Bullet - The Inspiring Story of A Braveheart - Ashok Kamte" with Vinita Kamte and is the author of "The Mighty Fall".)

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COMMENTS

jaideep shirali

11 months ago

In addition to all the legal reasons for BCCI to cpme under the RTI, I have a common sense based question. If the BCCI team is allowed to fly the national flag and call itself the national team, it must come under RTI. Otherwise let Pawar & Co. call BCCI's team by some other name and let the actual Indian team get all the privileges that a national team deserves. We will find other players to play for India, never mind if it takes time. BCCI is the proof of the pudding to show what our politicians are capable of.

Raj K Swamy

11 months ago

BCCI has no qualms about availing Govt concessions be it in taxes or land/facility allocations, use of public facilities for conducting matches/police security,Power/water /traffic diversions as well as claim to select and play with "National" team. So in return they shoul conduct their affairs transparently and be accountable to their customers ( which is us) as well. If not, it is for the customers to boycott BCCI events/matches and pressure them to be transparent- Otherwise the customers must share the blame.

Ankur Bhatnagar

11 months ago

I have a question here: Who or what is BCCI as an entity -- is it a private company, a society, a trust, a department under the sports ministry, a non-profit, an NGO...? Who owns the profits generated by BCCI?

If it is a private company, how can it be subjected to RTI or government or judicial scrutiny unless they break any law?

R Balakrishnan

11 months ago

They also get some tax breaks- Since that amounts to the taxpayers subsidising them in a manner of speaking, it is only fair and proper that they disclose to the fullest.

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