P2P Lending Set to Explode in 2018 And Beyond
RBI’s much awaited official guidelines for Peer to Peer (P2P) lending platforms to bring them into the ambit of non-banking financial companies (NBFCs) is set to boost online lending. It is fast emerging as an investment option for retail lenders.
The NBFC-P2Ps will act as an intermediary to provide an online platform to lenders and borrowers to transact on mutually agreeable terms. RBI has defined P2P lending as a form of crowdfunding that entails issuing unsecured loans to borrowers via an online portal in its 2016, ‘Consultation Paper on Peer to Peer Lending’. However, P2P lending is different from other crowdfunding activities in being a purely debt product, in which multiple lenders fund borrowers as personal loans or small business loans.
Most of the P2P platforms in India curate their borrowers after conducting KYC checks, credit assessment, and due diligence before listing them on their loan exchanges. Speaking about the regulations, Mahendra Agrawal, Director IndiaMoneyMart remarked, “RBI guidelines are quite encouraging to enable P2P businesses to scale and grow. This will help in addressing the access and affordability of credit products to the customers not served by traditional financial institutions such as banks or NBFCs. In the long run, the regulations are likely to reduce the risk of loan defaults and offer steady returns to lenders.”
Agrawal added, “This move has brought more confidence to P2P lenders. It will enable greater co-operation between P2P and BFSI players to make the credit market deep, accessible, transparent and customer friendly. The regulation gives credibility to P2P lending as an asset class to diversify and gain returns on their investments.” As per a PwC report, the P2P lending market is likely to grow to USD 5 billion by year 2020.
On the positives, the regulation has made P2P lending platforms accountable to furnish credit repayment/non-repayment information to all 4 credit bureaus, thereby increasing transparency in the credit rating system. The credit rating agencies have records on about 150 million population but P2P lending platforms are also going to bring customers hitherto relying on private money lenders. This presents a huge opportunity to close the credit information gap. It will also reward sub-prime borrowers with a better credit score for showing improvement in loan repayment behaviour.
As many first time or retail borrowers take loans from money lenders or payday companies which charge interest as high as 5% to 20% per month, P2P platforms like IndiaMoneyMart are bridging the gap by making credit not only accessible but affordable. Bangalore-based IT consultant, Tanmay Thorat* (name changed) was paying over 300% interest to payday loan companies and approached IndiaMoneyMart for a small ticket size loan of INR 1 Lakh secured at rate of 13% annualized interest in March 2016required to settle his credit card debt and pay rent deposit. He says, “IndiaMoneyMart has helped me secure a cheap loan and enabled me to emerge from a debt spiral. I am grateful to its lenders. I am expecting to be completely debt free by September this year.” He further intends to become a lender on this platform once he is debt free.
The expectation from the Union Budget 2018 is immense in the BFSI segment, especially after RBI regulation. Experts hope that essential financial services will have GST rates revised from 18% to 5% or nil. By virtue of limiting the maximum investment across all P2P platforms to INR 10 Lakhs, small investors are likely to drive the industry. P2P investors are lending to credit hungry masses devoid of access to services offered by traditional channels or altogether not served by them. In return, investors have an opportunity to earn handsome returns up to 25% annually.
Though by putting restrictions on the amount lent has distributed the risk across multiple lenders, still participating in such retail loans has its own limited risk. It has been mooted that lenders should be exempt from paying tax on interest income from P2P platforms. They are agents-of-change that enable and empower borrowers to access credit services at reasonable rates. Each lender is positively contributing to power India’s consumption story where banks and traditional channels have failed to serve the aspirations of borrowers at affordable terms with prompt service, especially first time borrowers or those struggling with credit card or payday debt.
Pawan Modi, a Mumbai-based active P2P investor remarks, “It is a heartening to see RBI recognize P2P lending as a legitimate asset class. I have funded over 33 borrowers in last one year. The returns are better than many mutual fund schemes. The regulations will help us identify more credible borrowers in coming times and make us more confident with lending decisions if government were to exempt taxation from P2P interest earnings.”
According to Shankar Vaddadi, Founder & Director, i-Lend, “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.
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