In the recent past, the performance of some of the banks has been disappointing. Banks can always exercise the option of denying loans to many small-time borrowers due to a weak credit history. At the same, their Non-Performing Assets (NPAs) have exposed the flaws in their risk management systems.
As a result, many individuals are often left with little choice but to explore other options for loans. Peer To Peer (P2P) Lending is one of the alternatives available to the customer today.
Peer To Peer (P2P) Lending—the need of the hour
The P2P lending industry is relatively new to India. As the name suggests, it allows borrowers and lenders (investors) to connect directly with one another, eliminating the role of banks altogether. This is a win-win situation for both borrowers and lenders, as good borrowers get loans, albeit, at a higher rate, while investors get higher returns for retaining the risk associated with lending. P2P Lending platforms use technology to connect borrowers with investors. Also, the emphasis of competent players in the P2P industry is on pricing the risk appropriately.
But make no mistake. This is not to say that P2P Lending platforms are a place meant only for sub-standard borrowers. High-quality borrowers come to P2P Lending Platforms in search of better deals.
India’s P2P Lending sector is poised to grow at a rapid pace thanks to favourable demographics, rising computer literacy, internet connectivity and the ongoing wave of digitalisation among others. With the higher economic growth, the credit-backed consumption growth may jump too.These could be the possible triggers for the growth of P2P Lending Industry.
There is no official assessment suggesting the size of the market in India. But it is estimated to be around Rs 200 Cr. The P2P lending industry may grow 25 to 30 times over next 5-6 years. Talking about the interest rate, the yield on 10-Year Sovereign benchmark bond hovers in the range of 6.45% to 6.95%.
However, it is also important to note that the P2P Lending sector is unregulated. The RBI released a discussion paper last year aiming to evoke the perspective of various stakeholders concerning the need to create a legal and regulatory framework for the sector. Once the industry comes under the purview of a regulator, enlisting borrowers and investors would become incredibly easy, as they will have more confidence in the sector as a whole.
The government has been slashing administered rates on Small Savings Schemes (SSS) such as PPF and NSC to create a level playing field for banks. Under the current scenario, 8% interest rate for the maturity of up to 5 years appears to be the ceiling in case of the majority of investors/depositors.
On the other hand, in P2P lending projects, investors can earn in the range of 14% p.a. to 30% p.a. on a reducing balance method. In P2P Lending, interest rates are decided depending upon the creditworthiness of borrowers.
In the coming years, unless they increase their efficiency, banks would find it difficult to cope with the changes, especially on the retail lending front. P2P industry stands a good chance to make a dent into banks’ retail business with their flexibility, efficiency and a better product portfolio.
The author, Vaibhav Pandey is Co-Founder of i2ifunding.