HomeMedia CenterBloomberg: In Game Of Loans, RBI Arms A New Player

Bloomberg: In Game Of Loans, RBI Arms A New Player

Amit Parker, 26, needed money for his father’s heart surgery. Banks refused to lend as he had delayed repayments on a motorcycle loan three years ago. The travel firm executive tried his luck at LendenClub (Lenden is Hindi for give-and-take), an online portal that connects individual borrowers with lenders. He managed to get Rs 70,000.

“I have a decent salary yet banks were not ready to lend because of the late repayment. It’s not that I had defaulted,” he said.

For people like Parker who are not considered creditworthy by banks, peer-to-peerlending platforms offer an option. Fintech startups have stripped it down to basics: connect those who need money with the ones willing to invest. From a young professional who wants to repay bank debt to those requiring money for emergencies or even a holiday, all kinds of borrowers are logging in.

Most of these are small-ticket transactions, and the market is small. A few hundred such loans are disbursed a month with only the young with poor credit record or the tech-savvy borrowing, Rajiv Raj, co-founder of credit-scoring platform Credit Vidya, told BloombergQuint. Adoption could improve once the central bank comes out with guidelines.

The Reserve Bank of India on Wednesday provided that clarity, bringing P2P lending platforms on a par with non-bank finance companies. And the opportunity is huge. More than 30 such startups have come up in the last four years, including Faircent, i2ifunding, LenDenClub and Billionloans.

A PwC paper estimates the market in India to reach $5 billion by 2020 while the global market could be worth $150 billion.

 

Also Read: Peer-To-Peer Lending Platforms To Be Regulated As NBFCs

Nearly three-fourths of borrowers on Faircent have a score of less than 700, a threshold below which banks don’t consider them creditworthy. In contrast, more than three-quarters of LenDenClub’s users are above that level.

Such platforms do due diligence and use algorithms to evaluate a borrower’s risk profile. Only 5 percent of loan requests that come on i2ifunding are approved, said co-founder Raghavendra Pratap Singh.

Yet, since it involves lending to people with poor credit scores, interest rates can go as high as 28 percent. That didn’t deter Parker from taking another Rs 1.5-lakh loan on LendenClub. He wishes to continue borrowing on the platform.

Investors Chase High Rates

The stickiness despite high rates is due to convenience as borrowers don’t have to go through cumbersome bank procedures, said Harish HV, partner at Grant Thornton who tracks startups. “The ticket size is not too large. So even a 5 percent interest difference is not huge.”

Which makes it lucrative for people like Jagriti Mishra, 25, who are willing to take the risk and lend money. A friend had introduced her to P2P lending. Three years into her job at a multinational in Bengaluru, she loaned Rs 8,000 on i2ifunding. Eight months on, Mishra has lent about Rs 60,000.

“I tried traditional investment options like recurring deposits that gave an interest of about 7 percent,” she said. That compares with the average interest of 22 percent she earns on the platform.

Peer-to-peer lending is a medium-risk investment if one keeps the portfolio diversified, said a Mumbai-based investment banker who lends through such platforms. It contributes only 7 percent of his overall investment portfolio, he said requesting anonymity. The key hurdle was the lack of clarity from the RBI, he said before the central bank notification was issued.

Lack of clear guidelines from the regulator had kept big investors away. Between 2014 and 2016, only five such companies could raise close to $8 million, according to an in October 2016 report by Tracxn, a startup intelligence firm.

Investors were holding their bets till regulatory clarity, said Sanjay Swamy, managing partner at Prime Venture Partners, a seed-stage fund. Once that’s taken care of, they will be open to looking at such companies, he said.

The P2P startups said business is growing 15-20 percent month-on-month. “There is a huge unserved market that banks and NBFCs are not able to fulfil,” said Bhavin Patel, co-founder of LendenClub, which does 150 transactions a month, with an average ticket size of Rs 1 lakh.

Default Risks

Millennials are the most active lenders and borrowers, Rajat Gandhi, co-founder of Faircent, said over the phone. About 60 percent of its 18,000 members are below 35 years. For its Mumbai-based rival LendenClub, more than two-thirds of its users are 30-40 years old.

They largely borrow to improve lifestyle. That largely conforms to the borrowing trends among the young.

They are not taking home loans or family loans, but are spending to start their new venture, purchase accessories, or a new vehicle, and are borrowing for their future.

Gayatri Jayaraman, Author, ‘Who me Poor? How India’s Youth is Living in Urban Poverty to Make it Big’

That throws up the risk of defaults, a problem India’s banking industry is already grappling with. For LendenClub, 1 percent of the loans have not been repaid, while defaults are higher at 4 percent for i2i funding.

Risks to P2P lending are no different from what banks face, said Anirudh Damani, partner at an early-stage venture capital firm Artha India Ventures, that has backed LendenClub. “If a platform over leverages to a particular industry, for example consumer loans, and if the economy takes a downturn, then loans will go bad. It is important to diversify.”

Credit: Bloomberg

LenDenClub is India’s largest alternate investment platform which started operations in India in 2015. We have been helping lenders diversify their investments beyond traditional investment instruments ever since.

About

Lending

The Reserve Bank of India does not accept any responsibility for the correctness of any of the statements or representations made or opinions expressed by Innofin Solutions Private Limited, and does not provide any assurance for repayment of the loans lent through its platform.

LenDenClub is an Intermediary under the provisions of the Information Technology Act, 2000 and virtually connects lenders and borrowers through its electronic platform via the website and/or mobile app.

The lending transaction is purely between lenders and borrowers at their own discretion, and LenDenClub does not assure loan fulfilment and/or lending simple interest. Also, the information provided on the platform is verified or checked on the best efforts basis without guaranteeing any accuracy of the data/information verification. Any lending decision taken by a lender on the basis of this information is at the discretion of the lender, and LenDenClub does not guarantee that the loan amount will be recovered from the borrower, fully or partially. The risk is entirely on the lender. LenDenClub will not be responsible for the full or partial loss of the principal and/or interest of lenders’ lending amounts.

*This is an annualized yield and is subject to the maximum FMPP tenure, which is 5 years. P2P lending is subject to high risk and may cause an entire loss of principal.
 

*P2P lending is subject to risks. And lending decisions taken by a lender on the basis of this information are at the discretion of the lender, and LenDenClub does not guarantee that the loan amount will be recovered from the borrower.

** Average value mentioned is the weighted average of simple interest received by lenders

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