The last decade has witnessed the transition journey of fintech in India – from being the new kid on the block to becoming the binding force driving growth and accelerating innovation across the ecosystem. It has produced the most significant number of unicorns in the country and has built a seamless amalgamation between banks and technology companies. The fintech growth story has built a strong case for India globally with so many other notable accomplishments.
From payments to neo-banking to insurance underwriting and credit profiling, fintech has fathomed the lengths and breadths of the financial ecosystem in India on the back of technology. P2P lending, a sunrise sector in the country’s fintech landscape, marked its foray almost eight years ago; however, the sector is currently preparing the ground to embark on an accelerated growth trajectory, thanks to India’s growing demand for credit. P2P lending is gaining traction throughout the world, with the sector growing at a 17 percent annual pace.
Powered by technology, P2P lending has structured a robust process of lending and borrowing while making banking functionalities accessible to the masses. An individual investor or a financial institution can avail the platform as an investment avenue and lend while earning interest paid by the individual or business who has borrowed money. The platform thus unlocks the supply side of credit by mapping potential investors with those seeking loans.
What has thrust P2P lending into the limelight?
The credit economy of the country has remained skewed for the past few years, while growth across the lending sector has been particularly muted owing to a series of financial calamities such as the Yes Bank collapse, the IL&FS episode followed by the Covid-19 pandemic. While the knock-on effect is to pertain for some time now, the unlock phase picking momentum across the country backed by the festive season has revived credit demand in a big way.
P2P lending platforms focus on the credit needs of a large section of the populace who are otherwise outside the formal credit sector. The pandemic which pushed banks and financial institutions to adopt a cautious approach and tighten liquidity further widened the credit gap in the country. P2P lending has been diligently working towards bridging this gap while building a favourable lending and borrowing climate.
The sector today has deeply matured with the size and number of lending platforms growing rapidly. Riding on the waves of the economy unlocking, upcoming festivities and improved consumer sentiments, the sector is now offering tailored products to cater to the burgeoning credit demand of the country.
What makes P2P appealing as an investment option?
Double-digit yields are extremely difficult, especially at a time when the pandemic-induced lockdown has led to businesses being hurt, leading to volatility across equity markets, and extended periods of very low interest rates, among others. The returns offered by a P2P lending platform, which falls in the range of 10-13 percent are far too high in comparison to saving deposits or mutual funds.
With the simple idea of mapping borrowers looking for quick capital injection and connecting them to lenders looking to earn high returns, the platform is rapidly emerging as a new-age, alternative asset class that is gradually transforming the investment landscape in the country. Lenders are now processing the right loans in a safer and faster manner, as well as tapping into new markets, while borrowers are now empowered to avail credit seamlessly even from the remotest town or village in the country. The speedy clearing method and effective grievance conduit enable businesses to reach a high number of borrowers who were hitherto turned down by traditional banking systems.
Broadening the horizons while building trust
In September 2017, the RBI issued a new set of guidelines for P2P lending platforms. The notification required all P2P lending platforms to register as non-banking financial firms (NBFCs). The RBI has also lowered the maximum limit parameters for lenders on the P2P platform from 50 lacs to 10 lacs – a regulatory move highly applauded by the industry, which was heavily monitored and restricted previously.
Additionally, RBI has also advised all P2P operators to appoint a trustee to monitor the flow of funds between escrow accounts of borrowers and lenders. The guidelines prescribed by the apex body assert the trustee to be bank-promoted so as to maintain adequate monitoring of the platform. The regulatory measures have played a crucial role in boosting confidence among borrowers and lenders while enhancing the transparency mandate.
Future of P2P Lending
The Indian fintech sector has a significant number of viable players who are regulated by RBI and are excelling in their sector on the strength of advanced analytics, a solid back-end network and robust processes of collection and recovery mechanisms. The year 2020-2021 appeared to be a watershed event for alternative lending and investment products such as P2P lending, which revolutionized the Indian fintech ecosystem.
P2P lending has irreversibly altered the Indian fintech landscape forever. Every Indian is being offered easy access to instant credit. Thus rapidly building India into a credit-inclusive society while offering investors one of the most potential asset classes. In that sense, P2P lending is by far the most creative of all the recent fintech disruptors.