Not convinced that India will achieve financial inclusion by just opening bank accounts for every citizen, entrepreneurs such as VVSSB Shankar, founder & director, i-lend, India’s first peer-to-peer lending marketplace, is out to create a free market for credit. In an interaction with Shakti Patra, Shankar speaks about his company’s innovative risk assessment tools and much more.

Excerpts:

Could you please give us an overview of the peer-to-peer (P2P) lending market in India?

It’s pretty early days for P2P lending, or marketplace lending as we call it, in India. We are the first and have been here for about three years. As compared to this, P2P lending has been around for over a decade in the West. The potential in India, however, is immense.

One of the biggest reasons for this market taking root all over the world — be it Africa, Australia, Indonesia or the US and the UK — is that even in urban centres, not more than 15-20% of the population has access to credit at a moderate rate of interest. Financial inclusion doesn’t mean having a bank account. In its purest sense, it means having access to credit at a rate that one can service.

Doesn’t the lack of regulation make P2P lending very risky?

We mitigate the lack of regulation by self-regulating ourselves. Our self-regulation has three

components — complete transparency, full disclosures and total due diligence. We not only help our borrower asses his credit well, but we also tell him/her about the maximum amount of a loan he/she can service. Unlike banks, we don’t ask borrowers for a set of documents. We ask them for information and then cross-verify them with Aadhaar, voter ID, PAN, utility bill payment details, etc. Based on the availability of information on various databases, we make the credit profile of a borrower known to lenders. We also have internal algorithms, which inform both the borrower and the lender the amount of EMI the former can service per month.

Are your lenders savvy enough to assess the risk involved in lending through a P2P platform?

In P2P lending, the lender actually works like a bank, or rather the credit officer of a bank. But unlike a bank, which lends other people’s money, in P2P lending, you lend your money, assume the risk and get the reward. So, instead of earning, say, 4% on the money parked in a savings account, a lender can earn as much as 24%. We also assess borrowers’ social behaviour, something which traditional credit scores don’t take into account. They are all about one’s past. They don’t take into account, for example, job changes.

How successful has your system of assessing risk been as compared to the traditional ones used by banks and other financial institutions?

In Hyderabad, from where we started, a little over R1 crore has been disbursed so far. And this has led to a default of just Rs 74,000, which is less than 1%. I’ll say if we can maintain this trend, we would have cracked the risk assessment challenge.

Tell us about the profile of your average lender and borrower.

We have set a certain minimum qualification for lenders to ensure that they are coming into this with their eyes open. Firstly, they have to be at least graduates. Secondly, their annual income has to be at least R8 lakh. So, the age of our lenders ranges from about 27 to as high as 60. Moreover, we just don’t ask our lenders to tick a box and agree to our terms and conditions. We make them write and sign an exhaustive email stating that they have understood the risks, etc. On the other hand, our typical borrower is someone with an annual salary ranging from anywhere between Rs 3-4 lakh and Rs 15 lakh.

Given the profile of your borrowers, why would they come to your platform and not approach a commercial bank?

Firstly, banks are not very open to offering unsecured personal loans below a certain ticket size. Since the cost of servicing a loan is the same, banks mostly prefer personal loans of R3 lakh or higher. But on our platform, one can get a loan for R50,000 or even lower. Secondly, if one is not working for a so-called Category-I employer, getting a personal loan from a bank is very difficult.

Do you just charge a listing fee or do you retain a margin as well? What would be the average yield for lenders?

We charge 3% of the disbursed amount from the borrower and 1% from the lender. So, our earnings are a fixed percentage of the money that is lent through us. The average yield that our lenders earn is about 18.3%.