This summarizes part of the study on peer-to-peer lending in India conducted by the author during her research internship with Department of Economics and Policy Research at Reserve Bank of India.
Peer-to-peer (P2P) lending is a business model that has captured everyone’s attention globally and is now deepening its roots in India. With the advent of online industry, the financial sector is revolutionized; strongly attracting investors, businesses, customers, analysts as well as the regulators. Concerns over escalating non-performing assets (NPAs) and customer’s shift towards loans from private lenders (like family, friends, etc.) due to rigid collateral requirements and stringent availability of bank credit, coupled with various technological advancements and government initiatives towards cashless and digital economy, are responsible, to some extent, for the evolution of P2P lending.
Peer-to-Peer lending is an innovative form of crowd funding with financial returns. It involves the use of an online platform to bring lenders and borrowers together, thereby mobilizing unsecured finance. The platform enables a preliminary assessment of the borrowers’ creditworthiness and collects the loan repayments. Accordingly, a fee is paid to the platform by both borrowers and lenders for the process. Interest rates on the loan ranges from a flat interest rate fixed by the platform to dynamic interest rates as agreed upon by borrowers and lenders. One of the main advantages of Peer-to-peer lending for borrowers is that the rates are lower than those offered by money lenders or the unorganized sector. On the other hand, the lenders benefit from P2P lending as they enjoy higher returns under this scheme than those obtained from a savings account or from any other investment.
Although there has been significant growth in online lending platforms globally, there is no uniformity in the regulatory stance about this sector across countries. While P2P lending platforms are banned in Japan and Israel, they are regulated as banks in France, Germany and Italy, and are exempt from any regulation in South Korea. Differences in regulatory frameworks for the online lending sector across the world can be traced back to two opposing arguments. Those who are against regulating this sector believe that any such move might stifle its growth at this nascent a stage. On the other hand, proponents of regulation argue that unchecked growth of this sector may weaken the monetary policy transmission mechanism and breed unhealthy practices by market players which may, in the long run, generate systemic problems given the susceptibility of this sector to attract high-risk borrowers. The balance then lies in developing an appropriate regulatory and supervisory tool-kit that harnesses this sector’s ability to provide an alternative source of credit for the right kind of borrowers, facilitating growth in an orderly manner.
P2P lending in India can be broadly categorized into three types—microfinance, consumer loans and commercial loans. Currently, there are several online P2P lending platforms operating within the country. Some of these have targeted businesses undertaking microfinance activities with stated primary goals of having a social impact and providing easier access of credit to small enterprises. These are largely tech companies registered under the Companies Act. Presently, there are around 30 P2P lending start-ups in India. These companies have decided to form an association with the intention of self-regulation and are expected to complete their registration process soon. It is estimated that the P2P lending sector in India is worth INR 20 crore and is expected to lend approximately INR 1.25 crore per month in the future.
According to the data available at Faircent’s website, INR 334.9 lakh loan amount has been proposed for high risk interest rates i.e. 22 – 26 percent followed with INR 307.47 Lakh loan amount proposed for Medium risk interest rates (18 – 22 percent). The average rate of interest (27.86 per cent) has been earned under very high-risk bucket (26 – 32 percent) and the highest average loan tenure (24.65 months) has been granted under high- risk and very high-risk bucket. The maximum number of defaults have happened for the short-term loans (6 months) or under very high-risk bucket (4.93 percent).
According to the data available at i-Lend’s website, there is a gap between the number of lenders willing to lend and number of lenders who have lent partial or full amount. The gap also exists in the amount one is willing to lend and that which has been lent. This gap represents the demand-supply gap of the lending market on the platform. The maximum gap is within the interest bracket of 22 -26 percent and the minimum is in 12 – 14 percent. This make sense, as the lenders will always want to earn the highest interest rate and the borrowers will always want to pay the lowest interest rate. Similarly, this gap can also be seen on the borrowers’ side of the market, in terms of number of the borrowers participating and the amount of borrowings. The maximum gap, again is within the interest bracket of 22 -26 percent while the minimum gap is now within 18- 22 percent. Also, the demand-supply gap on this platform is observed to be maximum for the loan tenure of 12 months followed by that of 18 months. In addition to that, the demand-supply gap is seen to be maximum for loans used for debt consolidation; the second-widest demand-supply gap is noticed in education loans.
P2P lending is driving huge unorganized lending sector in India. Data available on i2ifunding website shows the wide network of P2P lending and how it is connecting borrowers and lenders from across the country, mostly targeting those states that have a persistent alternative source of lending. The maximum number of borrowers on this platform are from Delhi (55.80 percent), followed by NCR (19.48 percent), Maharashtra (6.86 percent, excluding Mumbai), Karnataka (5.71 percent), and UP (4.13 percent).
- Make P2P lending reach more citizens: States like Tamil Nadu, Rajasthan, Bihar and Andhra Pradesh have more than 50 percent of outstanding cash debt through non-institutional agencies and almost no presence of P2P lending.
- Reduce the demand-supply gap: A persistent gap between demand and supply can push the lending market to fail.
- Cap the borrowings where maximum defaults are recorded: Maximum number of defaults have been observed for short-term loans or under very high-risk bucket.
- Introduce Orchard platform for P2P lending: The interest rates in P2P lending sector are high and increasing, compared to 10-year government yields and other benchmark interest rates, which are relatively low and decreasing.