Peer-to-peer lenders, which facilitate direct borrowing and lending via technology-based platforms, have seen continued growth in business amid a credit crunch across non-bank lenders.
The 19 P2P lenders have now facilitated disbursals of close to Rs 500 crore, estimate industry executives who say that a good chunk of this growth has come in the last twelve months. While P2P lenders are registered with the Reserve Bank of India, the regulator does not release lending data for these platforms. As such, BloombergQuint could not independently verify the extent of loans given out via these platforms.
Increased Demand
Anecdotally, though, executives running these platforms say that growth has been strong. This growth has been led by borrowers of non-bank lenders who have reduced fresh disbursements due to tight liquidity conditions.
Globally, P2P lending started after the 2008 recession when institutional players moved out of active lending in the small and medium enterprise and retail loans segment due to a liquidity crunch, said Rajat Gandhi, founder and chief executive officer at Faircent, which is among the largest P2P platforms.
“Since there is a similar situation playing out in India, we have grown nearly 50x since last year. We have gone from disbursing around Rs 2.5-3 crore of loans every month to around Rs 110 crore every month as of date,” he said. BloombergQuint could not independently confirm these numbers.
India’s non-bank lenders were hit by a liquidity crunch after the collapse of Infrastructure Leasing & Financial Services in September last year. Since then, liquidity via the debt markets and banks has been constrained.
According to Ajit Kumar, founder and CEO at RupeeCircle, smaller NBFCs have been hurt the most by the liquidity crisis both in terms of their inability to raise funding and pricing power. “These smaller NBFCs were catering to specific borrowers like micro or small enterprises who have seen credit availability reduce. As a result, we have seen our business grow in such segments,” he said.
Kumar added that lower loan disbursals from traditional NBFCs have worked to the benefit of P2P platforms that operate in specific areas like consumer finance, asset-financing, rural or MSME lending.
“The rapid growth for the various P2P platforms has not come because of tighter underwriting standards by the larger and established NBFCs but because of a widespread lack of credit in the system,” said Gandhi.
Has Supply Increased As Well?
Since P2P platforms work on individual borrowers looking to take funds from individual lenders, an increase in demand must be matched by an increase in supply for growth in volumes.
Has that happened?
Platforms have begun actively targeting retail investors in order to draw them in.
“Ultra-high-networth individuals may be deterred from investing in P2P platforms due to the regulatory caps and a lack of understanding and experience with the asset class. But there is enough capital with retail investors,” said Bhavin Patel, co-founder and CEO at LenDenClub. The platform claims to have attracted over 25,000 retail investors, who otherwise invest in mutual funds.
Similarly, Faircent has targeted retail investors by partnering with 300-odd wealth management service providers who pitch P2P investing as an alternative asset class to capital-market investments.
Monexo, another such platform, recently launched a monthly income plan and a systematic investment plan for investors. The platform’s Founder and CEO, Mukesh Bubna, believes this could act as a model for the industry to generate a consistent flow of funds.
At present, the RBI’s regulations restricts the average exposure of an investor to all borrowers on a P2P platform at Rs 10 lakh at any point of time. No single investor or lender can provide the same borrower with loans exceeding Rs 50,000, according to the RBI’s regulations.
Rajiv Ranjan, secretary of the Association of NBFC Peer to Peer Lending Platforms, said that “the past year has been a blessing in disguise as it has prompted all P2P players to look inward in terms of their technology platform and the best product mix for ensuring sustainable returns for the investors”.
Ranjan said that the industry continues to engage with the RBI and the Finance Ministry to relax or remove the investor or lending limit. Even if this happens, the industry will scale up only gradually, he added.
“At present there is no established model for the industry so in the interim each individual platform will try various permutation-combinations. It will take a couple of years for any individual player to scale-up, prove the underwriting and collection ability and only then can they convince investors to invest more going forward,” Ranjan said.
Inherent Risks
While P2P lending in India is still small, the inherent risk in the model remains an inability to manage defaults.
“Unlike microfinance lenders or some NBFCs who embed themselves in a specific lending business and geographical area, P2P lenders are distant and the collection mechanism is therefore weaker,” said Manish Jain, partner at KPMG India. “MFIs or specialised NBFC lenders are able to identify when there is stress in the environment and can advise the borrower on best ways forward, to avoid defaults, for example. P2P lenders cannot provide this financial discipline knowledge to their borrowers,” Jain said.
If there are loan defaults or dues are not collected properly, the borrowers’ credit score can be affected, he said. “This could lead to the borrower being locked-out the formalised financial system and force them to go back to the informal, money lender system.”
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