By Bhavin Patel
For decades now, Indias banking industry has been weighed down by complex regulations, multi-level infrastructures, and policies. The gap between the demand for credit and it supplies has widened in the last few years, as the growing volume of non-performing assets (NPAs) among banks has significantly impacted the retail lending segment.
The biggest limitation in Indias traditional banking sector has been its outdated approach to lending, which is based on referring to borrowers CIBIL scores for lending decisions, thus excluding a large swathe of the countrys population from being able to avail credit. This is where an alternative lending product such as online peer-to-peer (P2P) lending steps in, providing a progressive and technology-driven avenue for consumers and MSMEs (micro, small, and medium enterprises) to access credit.
P2P lending in India
While it was in 2012 that online P2P lending made its way to India, it was only in 2016 that the Reserve Bank of India (RBI) indicated towards bringing this emerging industry into the mainstream. In a consultation paper released in April 2016, the RBI provided a skeleton framework for P2P lending in India, and in October 2017, released the formal regulatory guidelines which inducted P2P platforms into the non-banking financial corporation (NBFC) segment.
Peer-to-peer lending, a form of debt financing, is characterized by an extraordinary level of efficiency, transparency, and speed it brings to the lending process. There is no central authority to be consulted on lending decisions as P2P lending platforms only act as intermediaries between lenders and borrowers and connect them to each other through an online interface. Moreover, since the entire process from borrowers applying for loans, to underwriting, till the disbursal stage is online, borrowers can have their loan requirements funded in just a couple of hours, as opposed to the long-drawn process of trying to get a loan from banks or NBFCs. A major impact, therefore, of the RBIs regulations and certifications on P2P lending will be that more consumers will make a shift from traditional NBFCs and banks to P2P platforms to have their credit requirements met.
Advantages of P2P lending
There was a similar trend in countries like the US and UK where P2P lending platforms have come to be more preferred by consumers over traditional banks. This is because as an alternative source of credit, P2P lending platforms have a vastly more inclusive and transparent credit underwriting system. They leverage diverse information sources and use data analytics, machine learning, and predictive models to determine the creditworthiness of borrowers. As a result, they allow multiple borrower segments such as salaried individuals, new-to-credit consumers, MSMEs, and even high-risk borrowers to easily acquire finance in a hassle-free manner.
The certifications and licenses given to recognized NBFC-P2Ps will, therefore, help in increasing the confidence of both lenders as well as borrowers in P2P lending and facilitate the creation of a robust lending ecosystem within a credit-starved economy like India.
At the same time, it will also further promote the online P2P lending sector as a lucrative asset class among investors in the country looking for better returns and means of wealth generation than those offered by traditional investment instruments. More importantly, though, the recognition by financial regulators and the law will open up several attractive prospects for P2P lending companies in terms of investments and funding from venture capital firms or institutional lenders. This will allow them to expand in terms of scale and geography to reach more consumers and ensure a smoother supply of credit in the economy.
The P2P lending industry in India, currently worth around $25 million, is estimated to reach around $4 billion by 2024, with the rising demand for credit in the country expected to play a major role in its growth in the future. However, the biggest opportunity for the industry lies in the MSME sector, where there is a huge unmet demand for credit of approximately Rs 25 trillion, as reported by credit rating agency ICRA.
The current dynamics of the credit lending market indeed present some huge opportunities for both new as well as existing players to grow exponentially, and for consumers to benefit from this accessible affordable source of credit that has helped jumpstart the financial inclusion movement in the country.
Bhavin Patel is the Co-Founder and CEO of LenDen Club.