Lending money, the digital way

Lending money, the digital way

Lending money,  the digital way

With every sector embracing digitisation, the financial sector is not an exception. Now, lending and borrowing money is also going the digital way. For the past one year, there has been a sudden surge in the number of startups that do peer-to-peer (P2P) lending business in India. While hitherto, these startups were not regulated by any authorities, last week, the Reserve Bank of India (RBI) came up with a consultation paper on P2P lending, so as to regulate the sector. It also proposes a suitable framework for regulating this activity, which includes minimum capital, permitted activity, governance requirements, fair practices code for customer dealing and data security.

P2P lending uses an online platform to lend money. In this kind of lending, portals act as an intermediary.

“Though it is a new concept in India, the P2P lending market is growing globally. The US and the UK have ruled the market for years. Among the western countries, the UK granted $32 billion P2P loan in 2015, whereas the US accounted for $22 billion,” said Rajat Gandhi, Founder and CEO, Faircent.com, a FinTech P2P lending marketplace where borrowers and lenders interact amongst themselves to decide a mutually agreeable rate for their loans.

At present, it’s not only popular in the West, but also in Asia. “The fact that China has 1,500 P2P lending platforms clearly shows that how this form of lending can be a game changer. When it comes to India, we are seeing a huge demand, not only from borrowers, but also from lenders. In India, P2P lending is expected to attain a size of $4-5 billion in the next five years,” he added.

According to data released by P2PFA(Peer-Peer Finance Association), the cumulative lending through P2P platforms globally, at the end of Q4 of 2015, has reached £4.4 billion. Lending through P2P has grown dramatically from £2.2 million in 2012 to £4.4 billion in 2015.

“For people with idle money, instead of earning 6-8% returns by depositing in banks, we offer an alternative investment opportunity to lend money directly to pre-verified borrowers listed on our website and earn better rate of return,” he said.

Faircent.com has over 5,000 registered lenders and 20,000 registered borrowers, and has disbursed a total loan of Rs 3.5 crore in less than 16 months.

Loan in 10 minutes!
Another FinTech startup, EarlySalary.com, a mobile app-based lending platform, offers loans and relies on technology layers which allow short-term loans, between seven and 30 days. After Pune, it has started its operations in Bengaluru recently. “We already have 48,000 app downloads, and we are planning to start our operations in four more cities in the next quarter,” said Akshay Mehrotra, Co-Founder and CEO of EarlySalary.com.

Explaining how it works, he said, “It operates similar to cash advance or cash withdraw from a credit card or salary advance. Consumers need to download the mobile app from Google Play store, share a few details, including Facebook and LinkedIn login details, PAN card number and bank statement. Within 10 minutes, EarlySalary.com decides to lend him/her the money and initiates procedure to transfer money to the consumer’s account,” adding, “The decision to lend or not to lend is powered by Social Worth Score generated by the company looking at user profile data combining social media data with Credit Bureau data.”

Loanzen, an online platform in the FinTech space, started off as a P2P platform when it was launched in January 2016, but pivoted early on to being a direct lender and are in the process of becoming an NBFC.  “We are an incredibly under-banked country — be it short tenor business loans, thin file consumer loans or any of multiple segments. P2P lending has a bright future given the magnitude of the market opportunity, the advent of Mobile-Aadhaar-UPI trifecta and, clearly laid out regulatory roadmap,” said Madhu Sudhan, Co-founder and CEO of Loanzen.

Are there any challenges in this particular space?  “Generally, world over, P2P platforms do not work on the principle of guaranteed returns. If anyone promises that, then there is no point in being a platform anyway. The right way to address the risk is to pool a large number of loans which is how Lendingclub in the US does it. The challenges that they face, however, have to do with current securitisation and consumer deposit acceptance guidelines that exist today,” he said.

Impact on brick and mortar branches
The RBI is doing the correct thing by releasing the consultation paper on P2P lending, says Charan Singh, RBI chair professor of economics, IIM Bangalore.
When asked about the future of traditional financial institutions, Singh said, India is a vast country and therefore has space for all types of enterprises. “In the short to medium term, brick and mortar branches would continue to exist and flourish without any challenge to their volume of business and would co-exist with the new types of financial intermediation.  In the long run, however, such innovative banking activities could impact brick and mortar branches as well as traditional system of financial intermediation.”
Will this P2P lending bring down the lending rates in future? Singh said, “Lending rates have traditionally been in the range of 2-3% in real terms.  The nominal rates do fluctuate with inflation and uncertainty. The availability of financial resources through innovative methods should not impact real interest rates.”

The lenders are entering the P2P market for better returns than what they can expect from banks or other financial markets.  “Higher returns are reward for higher risk. 

Therefore, to stem this greed for too high a return, speculative in nature, the RBI is probably considering of regulating the market.  Otherwise, P2P would be a sort of digitalised/electronic money lender platform,” he said.

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