The increasing penetration of smartphones and availability of mobile data at extremely affordable rates has revolutionized the face of India’s digital economy. India is poised to be a USD 4-trillion economy by 2022, of which USD 1-trillion would be digital economy. On a similar note, the Govt. of India emphasized on digital economy and announced various budget allocations to boost digital Indian economy in the Union budget 2018.
The NBFC sector in India has grown significantly during the last few years and has become an important segment in the financial sector contributing to almost 10 per cent of total assets in financial sector. P2P lending platforms are expected to play an important role in contributing to India’s growth story.
The Union Budget-2018 brought a lot of cheers for the FinTech industry; allocation to Digital India scheme doubled to Rs 3073 crore, which will focus on digital initiatives and the need for innovative solutions whilst promoting digital economy. Digital economy was a focal point for this budget ’18 as government’s support with regard to lending MSME's allocated 3794 crore in the form of capital support and interest subsidy by 2022 which will help develop the MSME sector. Micro, Small and Medium Enterprises (MSMEs) contribute about a third of India’s manufacturing output and provide employment to over 10 crore people. Despite this, the share of institutional lending in the total borrowings of MSMEs is less than 10%.
What makes online P2P lending even more lucrative as an asset for potential investors is the fact that it offers lenders the opportunity to diversify their investments across multiple risk buckets and loan requirements, with the help of advanced primary and secondary research that has been performed by the industry experts and analysts through the best accessible techniques. It enables creditworthy borrowers lower their cost of loans and individual lenders/investors to lend directly to their peers and community thereby earning higher returns.
In October 2017, RBI issued a guideline to companies operating in peer to peer lending platforms and classified them as NBFC-P2P. This is the twelfth category of NBFC introduced by RBI with the last one being for microfinance companies (i.e. NBFC-MFI).
RBI defines ‘the business of a peer to peer lending platform’ as the business of providing under a contract, the service of loan facilitation, via online medium or otherwise, to the participants who have entered into an arrangement with that platform to lend on it or to avail loan facilitation services provided by it. The prudential guidelines include maximum leverage ratio that can be maintained (2 times), minimum net owned funds (Rs2 crore), cap on aggregate exposure of lender to all borrowers (Rs.10 lakh), borrowers across all P2P (Rs10 lakh), exposure of single lender to borrower (Rs50,000) and maturity of loans (not exceed 36 months). Apart from these norms, RBI has also prescribed fund transfer between participants to be done through escrow arrangements operated by the Trustee appointed by the bank maintaining escrow accounts. The guidelines highlighted an emphasis on the transparency and disclosure requirements to the lenders, borrowers in the public domain. This includes an overview of credit assessment/score methodology and factors considered, protection of data, grievance redressal mechanism, portfolio performance on non-performing assets on monthly assets and segregation by age.
What is Peer-to-Peer Lending - With peer-to-peer lending, borrowers take loans from individual investors who are willing to lend their own money for an agreed upon interest rate. Peer to Peer lending is already a hugely successful model for alternate financing across the globe.
With P2P lenders coming under RBI purview, there will be better transparency in the system and higher confidence amongst participating lenders and borrowers. In the global space, P2P lending has been growing year on year in terms of both volume and number of players. Globally, USA, UK and China markets have been dominant in terms of P2P lending. In India, the industry is at very nascent stage and has limited operating history. Various reports mentioned that P2P lending will continue to grow given its current nascent stage.
In India, more than 70 percent people are rejected from availing a personal loan from bank or NBFC due to risk portfolio and most of the time loans are available only to salaried employees with annual gross salary of Rs 3 lakh or higher. However, P2P lending market place works differently, it uses multiple parameters to determine creditworthiness of borrowers and they do not decline a loan application even if the borrower’s salary is considerably low. Technology has made the process of lending and borrowing simpler to get quick cash or earn great returns. The process is initiated when the borrower applies online for a loan and post application approval, the lenders fund the loan amount.
What’s new for Borrowers & Lenders?
For borrowers, the P2P market place enables a swift application process with little documentation, faster decision-making compared to traditional financing institutions, and they also get competitive interest rates and repayment flexibility. Similarly, lenders get better return on their investment, specify risk aversion/return and get quick returns on investment.
Currently, there’re more than 20 players in the market.
Rajiv M Ranjan, Founder, PaisaDukan.com