P Kanwal is from Punjab’s Bhatinda. He has a furniture business which mainly deals in cash, because of which it was difficult for him to get a secured loan from the formal banking system. For him, a Peer-to-peer (P2P) lending platform came as a rescue, which got him an unsecured loan for his kid’s education and expanding his business.
This not just the story of Mr Kanwal, but many more small entrepreneurs who are operating their businesses in Tier-1, Tier-2 cities and far-flung areas, some not even on Google map, who are getting financial support through P2P lending. One such lending platform is Faircent, which has got loans worth about Rs 123.28 lakh approved through its platform in about three years.
According to a social impact report by Faircent, the tech-driven approach of P2P lending has been empowering Indian businesses and consumers. Faircent COO Vinay Mathews said, “India economy’s immense potential remains locked due to the lack of access to credit for a large section of its population. What is ironic is that this dearth is caused not because of a lack of available capital, but because of the restrictive processes that limit the seamless flow of credit.”
“P2P platforms are enabling Indians to fund the loan requirements of their fellow Indians and use their money to stimulate and reinvigorate the economy, especially the MSMEs,” Vinay Mathews added. The potential of P2P lending as a credit mechanism has been recognised by the Reserve Bank of India as well.
In October last year, the RBI, published the guidelines to regularise the P2P lending platforms as Non-Banking Financial Companies (NBFC), saying that even as it is small in its value, in future it holds the potential to “disrupt the financial sector and throw up surprises” and that the associated risks to the financial system “too important to be ignored”.
The pattern that emerges currently from the P2P lending is that borrowers from tier-2 and tier-3 cities comprised 20% and 17% of the total number of loans disbursed through the platform. The new-to-credit borrowers comprise 35% of fulfilled borrowers, while those with poor credit ratings accounted for 10% of the overall number.
According to Assocham-PwC, P2P firms either operate as NBFCs, intermediaries for banks/NBFCs or serve as a P2P lending marketplace to connect individual borrowers and lenders directly. By using a wide variety of non-traditional data to evaluate credit risk, these start-ups are able to verify the identity of an individual and determine their intent and ability to repay a loan.
However, there are risks associated with NBFCs and P2P lending as well. On Monday, the Financial Intelligence Unit (FTU) of the government released a list of 9,491 NBFCs as ‘High-Risk Financial Institutions’ for their non-compliance with Prevention of Money Laundering Act (PMLA).
Besides Faircent, Lendbox, Rupaiya Exchange, LenDen Club are some other popular P2P platforms. The industry of P2P lending platform grew from just 2 in 2013 to about over 30 in 2017.