P2P Lending: In Game Of Loans, RBI Arms A New Player 

Why are millennials flocking to peer to peer lending platforms?

4 min read
The P2P startups said business is growing 15-20 percent month-on-month.

Amit Parker, 26, needed money for his father’s heart surgery. Banks refused to lend as he had delayed repayments on a motorcycle loan three years ago. The travel firm executive tried his luck at Lenden Club (Lenden is Hindi for give-and-take), an online portal that connects individual borrowers with lenders. He managed to get Rs 70,000.

I have a decent salary yet banks were not ready to lend because of the late repayment. It’s not that I had defaulted.
Amit Parker

For people like Parker who are not considered creditworthy by banks, peer-to-peer lending platforms offer an option. Fintech startups have stripped it down to basics: connect those who need money with the ones willing to invest.

From a young professional who wants to repay bank debt to those requiring money for emergencies or even a holiday, all kinds of borrowers are logging in.

Most of these are small-ticket transactions, and the market is small. A few hundred such loans are disbursed a month with only the young with poor credit record or the tech-savvy borrowing, Rajiv Raj, co-founder of credit-scoring platform CreditVidya, told BloombergQuint. Adoption could improve once the central bank comes out with guidelines.

The Reserve Bank of India on Wednesday, 20 September, provided that clarity, bringing P2P lending platforms on par with non-bank finance companies. And the opportunity is huge. More than 30 such startups have come up in the last four years, including Faircent, i2ifunding, Lenden Club and Billionloans.

A PwC paper estimates the market in India to reach $5 billion by 2020 while the global market could be worth $150 billion.
Platforms like these do due diligence and use algorithms to evaluate a borrower’s risk profile.
Platforms like these do due diligence and use algorithms to evaluate a borrower’s risk profile.
(Photo Courtesy: BloombergQuint)

Nearly three-fourths of borrowers on Faircent have a score of less than 700, a threshold below which banks don’t consider them creditworthy. In contrast, more than three-quarters of Lenden Club’s users are above that level.

Such platforms do due diligence and use algorithms to evaluate a borrower’s risk profile. 

Only five percent of loan requests that come on i2ifunding are approved, said co-founder Raghavendra Pratap Singh. Yet, since it involves lending to people with poor credit scores, interest rates can go as high as 28 percent. That didn’t deter Parker from taking another Rs 1.5-lakh loan on Lenden Club. He wishes to continue borrowing on the platform.

Investors Chase High Rates

The stickiness despite high rates is due to convenience as borrowers don’t have to go through cumbersome bank procedures, said Harish HV, partner at Grant Thornton who tracks startups. “The ticket size is not too large. So even a five percent interest difference is not huge.”

Which makes it lucrative for people like Jagriti Mishra, 25, who are willing to take the risk and lend money. A friend had introduced her to P2P lending. Three years into her job at a multinational in Bengaluru, she loaned Rs 8,000 on i2ifunding. Eight months on, Mishra has lent about Rs 60,000.

“I tried traditional investment options like recurring deposits that gave an interest of about seven percent,” she said. That compares with the average interest of 22 percent she earns on the platform.

Peer-to-peer lending is a medium-risk investment if one keeps the portfolio diversified, said a Mumbai-based investment banker who lends through such platforms.

It contributes only seven percent of his overall investment portfolio, he said requesting anonymity. The key hurdle was the lack of clarity from the RBI, he said before the central bank notification was issued.

Lack of clear guidelines from the regulator had kept big investors away. Between 2014 and 2016, only five such companies could raise close to $8 million, according to an in October 2016 report by Tracxn, a startup intelligence firm.

Investors were holding their bets till regulatory clarity, said Sanjay Swamy, managing partner at Prime Venture Partners, a seed-stage fund. Once that’s taken care of, they will be open to looking at such companies, he said.

The P2P startups said business is growing 15-20 percent month-on-month. “There is a huge unserved market that banks and NBFCs are not able to fulfil,” said Bhavin Patel, co-founder of Lenden Club, which does 150 transactions a month, with an average ticket size of Rs 1 lakh.

Default Risks

Millennials are the most active lenders and borrowers, Rajat Gandhi, co-founder of Faircent, said over the phone. About 60 percent of its 18,000 members are below 35 years. For its Mumbai-based rival Lenden Club, more than two-thirds of its users are 30-40 years old.

They largely borrow to improve lifestyle. That largely conforms to the borrowing trends among the young. "They are not taking home loans or family loans, but are spending to start their new venture, purchase accessories, or a new vehicle, and are borrowing for their future,” says Gayatri Jayaraman, author of ‘Who me Poor? How India’s Youth is Living in Urban Poverty to Make it Big’.

That throws up the risk of defaults, a problem India’s banking industry is already grappling with. For Lenden Club, one percent of the loans have not been repaid, while defaults are higher at four percent for i2i funding.

Risks to P2P lending are no different from what banks face, said Anirudh Damani, partner at an early-stage venture capital firm Artha India Ventures, that has backed Lenden Club.

“If a platform overleverages to a particular industry, for example consumer loans, and if the economy takes a downturn, then loans will go bad. It is important to diversify,” says Anirudh Damani, Partner at Artha India Ventures.

(This article was originally published in BloombergQuint.)

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