Mumbaikar Amit C., 32, recently needed Rs 1.5 lakh for a medical emergency. Since he did not have the means to immediately arrange the money, he approached a bank, but found it difficult to secure a personal loan quickly. He tried some other banks, but in vain. Then some friends recommended the peer-to-peer lender LenDenClub. “They disbursed the loan in three days as promised. I did not have to do any follow up. I took Rs 70,000 from LenDenClub and the rest I arranged from friends and family. After repaying the loan in six months, LenDenClub offered a top-up loan, which I used to pay back the amount borrowed from friends,” he said.
While Amit borrowed money on LenDenClub, Ahmedabad-based professional Pratik H., 42, lends on the platform. “I feel that this segment has huge potential and so opted to become a lender in the P2P space. I had heard about this platform and to test the waters I invested a nominal amount, but gradually invested more. There are certainly some delays. The returns, however, are substantial enough to offset the delinquencies,” he said.
Though in a nascent stage in India, the future looks promising for P2P lending. Experts say currently the sector is valued at $3.2 million, but it is projected to grow exponentially in the next three years to some $5 billion. There are some 30 specialised online P2P lending platforms operational in the country to tap into this opportunity.
Globally, the P2P lending space has been active for more than a decade, and the past four years have seen the sector gaining good traction in the US, the UK and China. During this period, a lot of supervision and regulation has also been put in place. “In India, P2P firms have been around for five years, and the space has seen a lot of new players since early 2017,” said Amit More, founder and CEO of Finzy, a P2P platform. “There has been a lot of positive buzz around this industry since the Reserve Bank released the master directions on NBFC-P2P in October 2017. The P2P industry is in a nascent stage compared with the conventional unsecured loans segment. However, it is growing at a phenomenal pace. We expect this industry to have an annual disbursement of more than Rs 1 lakh crore by 2025.”
The potential for growth in the Indian P2P lending space is massive, considering the untapped market. The Chinese P2P lending industry, for instance, recorded transactions worth $445 billion in 2017 alone. “One of the key factors that is expected to help propel the P2P lending industry in India in the future is the fact that 19 per cent of the population is unbanked or financially excluded, as a July 2017 report by ASSOCHAM and EY says,” said Surendra Kumar Jalan, founder and CEO of OMLP2P.
One of the main driving forces behind the surge in P2P lending market would be the recent budget allocation to the Digital India scheme—it has been doubled to Rs 3,073 crore. “Additionally, the Reserve Bank has covered all the P2P operators with the regulation. Digital initiatives, digital economy, penetration of smartphones and the availability of affordable mobile data are supplementing the growth of P2P lending in India,” said Rajiv M. Ranjan, founder and chairman of the P2P platform Paisa Dukan.com.
Since P2P lending is a form of crowdfunding for unsecured loans to individuals and businesses without any standard financial intermediaries, getting approvals is simple and swift. “The conception of P2P lending in itself is market bending, its reach often encompassing and pushing its limitations. The transforming factor right now could be the possible integration of the blockchain technology with P2P lending. Similar to the P2P industry, the crypto industry also has shown accelerated growth with clear signs of merging with the mainstream. Of course, this will be an alternative way of P2P lending: the only difference being transactions will be made in crypto currencies,” said Ranjan.
The loan amount being disbursed every month through P2P lending platforms in India stands around Rs 15 crore. It was less than Rs 1 crore a few years back. “We disburse around Rs 1 to Rs 1.5 crore a month. It was just Rs 8 to Rs 10 lakh in 2015,” said Raghavendra Pratap Singh, co-founder of i2iFunding. “It has become significantly easier to get a business or personal loan from a P2P lending platform than a bank or any other financial institution. With the recent guidelines of the RBI, P2P lending platform in India aims for a greater structured growth. The defined guidelines under the master directions for NBFC-P2Ps issued by the RBI lays down the foundation for a business model which is strictly followed by the players.”
The main reason behind the growing popularity of P2P lending platforms in India is the ease of getting a loan and the minimal paperwork involved. “Lending and credit facilities in India are limited in their scope owing to the lack of comprehensive and dependable credit assessment and rigorous repayment processes,” said Jalan. “This creates a situation where many Indians, particularly young professionals without a credit history or people with poor credit scores due to extenuating circumstances, are unable to access credit from conventional financial institutions. Online P2P lending platforms connect investors directly with borrowers, and eliminate the involvement of intermediaries such as banks and NBFCs. P2P lending is promoting financial inclusion of the country’s masses by facilitating credit availability beyond traditional segments, and extensively leveraging technology towards achieving this goal. This minimises the complicated paperwork and long standby time faced by borrowers and lenders.”
Since these platforms operate mostly over a digital medium, the overhead costs required for maintaining and staffing a physical establishment are circumvented. “If the operating costs are low, such benefits can be passed onto borrowers in the form of lower interest rates and loan processing fees, and to lenders in the form of better margins and returns. P2P lending is also emerging as a highly lucrative and innovative asset class among Indian investors that gives them the chance to earn higher returns at easily manageable risk, unlike most investment instruments currently available in the market. Moreover, by providing small and medium-size industries with easier access to affordable credit, these platforms can finance greater growth for the Indian MSME sector.”
What differentiates P2P lending from traditional lines of credit is its technology-driven approach to credit assessment, which is a lot more inclusive than that of banks and other financial institutions. “Traditional lenders still have extremely rigid rules when it comes to making credit decisions,” said Rajat Gandhi, founder and CEO of Faircent, a P2P lending platform. “As a result, many potential borrowers, such as self-employed individuals and small and medium enterprises, who deserve credit, end up being excluded by the financial system. P2P lending platforms connect borrowers in need of credit with individual investors possessing surplus funds and make the process of availing it simpler and faster. As a result, borrowers are able to fulfil their financial requirements at significantly lower interest rates than what is available in the market. On the other hand, by investing their money in P2P lending platforms, lenders can generate much higher returns on their investments. For instance, lenders on our platform usually avail average annual gross returns of 18 to 26 per cent. This makes online P2P loans a lucrative alternative investment avenue for them.”
Lenders investing in such loans start receiving interest income as well as the principal amount from the beginning, and hence they can reinvest their profits in other loans and earn higher compounded returns. “What makes online P2P lending more lucrative as an asset class for potential investors is the fact that it offers lenders the opportunity to diversify their investments across multiple risk buckets and loan requirements. This diversification helps in minimising the risk of a big-ticket financial loss by spreading the fund across multiple borrowers. Many platforms also put a cap on how much a lender can invest in a single loan to further bring down the risk to capital,” said Gandhi.
These platforms claim that they try their best to make the process of getting a loan simple and fast. For instance, on Faircent.com, borrowers first register on the platform paying a fee and submit relevant documents. The entire process, from borrower registration to the disbursal of loans takes place online. With the help of the personal, professional, and financial information provided by the borrowers, its automated credit evaluation mechanism verifies the identities and assess the creditworthiness of borrowers based on around 120 parameters over 400 data points.
“Based on the parameters, we assign the borrowers an interest rate ranging from 12 to 28 per cent, and a loan repayment tenure from 6 months to 36 months. The whole process is completed within three days from the submission of documents, and post listing of the loan request lenders can make offers to fund the same. To make the process of funding easier and faster, we continuously launch various products for lenders. Recently, we used data analytics and historical data on returns to identify clusters of borrowers which have exhibited a set pattern when it comes to returns and repayments. We then created product categories for clusters of borrowers that have delivered high returns,” said Gandhi.
While the upper limit on Faircent.com for personal loans is Rs 1 lakh, it is capped at Rs 10 lakh for business loans. While registering on the platform, borrowers need to upload the documents pertaining to their personal, professional, and financial details. Once lenders have committed to fund a borrower’s loan requirement, a legally binding agreement is prepared. The loan disbursal process begins after this.
“The borrowers only need to provide some necessary information and upload the soft copies of the documents required. We do not accept any physical documents during loan application. The KYC verification is completed via online integrations with the relevant databases. Our proprietary credit algorithm goes beyond the traditional credit score by taking into account 130 parameters. Our algorithm assigns a Finzy score and rating to the borrower. The rating corresponds to an interest rate that ranges between 10.99 to 27.99 per year. On completion of the credit assessment, the loan is sanctioned. Once the borrower accepts the loan offer, the loan is listed on the platform and is available for multiple investors to invest in. On fulfilment of the loan and successful completion of the documentation, the loan is disbursed.” said More.
The EMI collections are facilitated via National Automated Clearing House (NACH). “Our credit assessment process allows us to go beyond the traditional means of evaluating borrowers,” said More. “Traditionally banks and other financial institutions depend on a credit bureau score, income range and the category of company that the borrower works for. We believe that a person applying for a loan is much more than a credit bureau score. Our hypothesis has been validated with multiple cases. On the other hand, we have also had cases that had a high credit bureau score, but on detailed assessment we realised they would not be the right borrowers to list on the platform, thereby allowing us to secure the right borrowers for the investors.”
LenDenClub offers loan approval on the same day of request, and disbursement in three days. It has so far given Rs 3.27 crore at an average return of 26 per cent. Another offering from the platform is short-term loans caled InstaMoney, for a period of one to three months for amounts between Rs 5,000 and Rs 10,000. “Such loans are delivered in two to three hours,” said Bhavin Patel, CEO.
Borrowers include people from various professions, geographies, and socioeconomic groups. In the personal loans category, borrowers usually avail loans for a range of purposes such as debt consolidation, education, travel or holidays, medical expenses, wedding expenses or family events and home improvement and expansion. On the other hand, entrepreneurs and MSMEs avail credit on the platforms for meeting working capital needs or to expand business. On some platforms, the borrowers are salaried individuals who are ignored by banks and NBFCs or those who want money quickly.
“We provide personal loans to salaried people from all tier-1 cities of India,” said Singh of i2iFunding. “We are offering loan to self-employed people only from Delhi and the NCR. It so happens that only those borrowers with no credit history or poor credit history usually come looking for a personal loan from our company. However, obvious wilful defaulters are turned down. We have a complete digital approach and there are mandatory documentation for a salaried person involving the submission of PAN Card, or gas bill/ property tax receipt/ house, registry papers, etc. We also insist on the last three months' salary slip and last two years' income tax returns for a salaried individual. For a business establishment, we insist on a business or the shop registration documents or GST certificate. We may also need a guarantor if the borrower lives in a rented apartment.”