How P2P Lending Industry Evolved In India

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In light of the impending regulation in the P2P lending sector in India, it is important to look at the evolution of the sector over the last four years and the travails as well as the resilience the main players have shown through their belief in the opportunity and the significant role it could play in the lending landscape in this country.

In the seventies and eighties, Indian banking sector was dominated by a select few banks all of which got nationalized and subsequently operated on quaint principles in lending and banking. Who can forget the ‘Tandon Committee’ norms on deciding working capital finance needs of an industrial enterprise? Retail lending was unheard of and there were only two cars available to buy on the chance that you could actually afford one. The arrival of MNC banks and later private banks ushered in a new wave of lending products and for the first time we started hearing about credit cards, personal loans and with widespread economic reforms, car loans and other such categories. Amidst this wave that the banking sector or rather banks enabled there were several innovations all driven by increased technological usage and development of core banking systems and that led to a massive eco-system from taking root in India which included DSA’s, Collection agencies, Credit verification companies, a whole host of lawyers and CA’s dedicated to becoming service providers for the banking sector. With all this technology led core banking systems etc., still Indian Banks have not been able to penetrate the market to more than 10 to 15 % in the urban space let alone rural. While the emergence of Micro Finance to some extent alleviated the situation in the rural spectrum, large swathes of urban India were still not included financially. The issue was the operating parameters of banks themselves and the simple exercise of pricing risk on linear models was found to be inadequate to service these sections who were highly aspirational both socially and economically but were denied credit.

It is in this macro scenario Alternative Lending or P2P lending came to India. Today, this sector has over 20 players and is growing fast with several categories emerging for this model and then in 2014 India heard of the word Fintech leading to a number of existing players scrambling to classify themselves as Fintech companies involving companies in Payments, Wallets, Money Transfers, Lead generators, Aggregators and what not, however the early P2P lending companies had to traverse a complicated minefield of state and central laws to ensure that the business model didn’t fall foul of any existing regulation while ensuring the purity of the business model which is that of a marketplace for unsecured lending to sections who were not serviced by the conventional financial organizations. For instance, some of the key challenges faced by early players in India were ‘Money Lending Acts’ in different states, The usurious loans act, The borrower protection acts and so on and it was a massive challenge for the pioneer to build a model which will be legally correct and does not fall foul of any of this myriad acts though archaic but still valid in this country.

The sector is today bound to find institutional backers once the regulation comes through but over the years the sector faced several challenges in raising funds, attracting talent, and building credibility, ensuring transparency and projecting themselves as a credible alternative to small borrowers who usually resort to borrowings from usurious sources in the absence of a solid financial background. The other major challenge again was the inability of these companies to access credit performance of borrowers but more importantly not being able to report loan performance to credit bureau’s which normally proves as a deterrent to high risk borrowers.

So especially over the last 4 years, P2P lending sector has broken new ground by introducing AI and Machine Learning into credit decision making process, making it more predictive rather than reactive, introducing paperless methods, bringing in a new category of lenders (Individuals) equipping them with credit decision making intelligence and expertise, reinventing the collection and recovery models and overall having a salutary effect on the lending landscape in India.

Today with the acknowledgement and the resultant decisions by the authorities to recognize this sector and accord it an official status Alternative lending or P2P lending is all set to change the lending landscape of this country and enable financial inclusion (which does not mean having a bank account. It means having access to credit at the right rate) in the true sense. 

[Disclaimer: The views expressed in this article are solely those of the authors and do not necessarily represent or reflect the views of Trivone Media Network's or that of CXOToday's.]