It was just before he demitted office in 2016 that the then Reserve Bank of India governor, Raghuram Rajan, the darling of the digital financial services sector, released a consultation paper on peer-to-peer lending.
P2P lending enables individuals to borrow and lend money through online platforms that match lenders with borrowers, and was expected to disrupt the consumer lending business, like what digital transactions have done to consumer payment.
But that was not to be — at least so far.
The consultation paper was released in April 2016 and the final guidelines came in a year and half later, in October 2017. There are, say industry executives, about 15 entities that have the licence to operate P2P platforms. But the volume of transactions — both the number of deals and the money that changed hands — has been paltry.
Industry insiders predict P2P platforms are currently doing less than Rs 100 crore of disbursals per annum where, according to RBI data, non-banking finance companies have distributed Rs 2 lakh crore between March and September last year.
Investors have also not been very bullish on the segment so far. Only a couple of the licensed platforms have managed to raise institutional funding. Most are still in the seed investment stage, looking for a major Series A round.
At a time when Indian consumers are lapping up loans for almost everything from buying high-end smartphones to honeymooning in Switzerland and backpacking across Europe after getting the first job, the P2P lending industry is missing out on the action.
The problems that plague the sector are various, from the profile of the borrower to the restrictions that the central bank has put on the business to prevent it from creating any systemic risk to the economy. While Indians typically stay away from any risky business, which P2P lending is, those who are ready to take the bet face regulatory restrictions, like a cap on the money they can lend.
Quality of borrowers
“Students cannot get loans through P2P platforms because of strict KYC requirements. Salaried customers are getting multiple options from either their banks or new-age digital lenders,” said Soumitra Banerjee, managing partner at law firm Fox Mandal who specialises in the fintech practice. “Then P2P tends to always attract the subprime segment, thereby interest rates tend to go up.”
The rates are high because the risks too are. The industry tried to tackle this by creating a fund to protect the investor, or lender. But the RBI has shot it down, Banerjee said.
However, industry executives say it was a misconception that only subprime consumers approach them for money.
“There is a perception that one who cannot get loans anywhere else can get so from a P2P startup, this needs to go,” said Achal Mittal, cofounder of Liquiloans which recently raised a pre-Series A round of Rs 12 crore. “We will try to lend only to prime borrowers; there is enough scope of disrupting this space as well.”
Perhaps a faster turnaround time and cheaper rates of interest could help bring customers to these platforms.
“P2P platforms have lesser operational cost, lesser regulatory overheads, hence in an ideal situation, the rate of interest should be lower,” said Surendra Jalan, founder of OML P2P, a Mumbai-based lending platform.
But the platforms are still not in a position to offer that, because lack of visibility on the steps to address risks, coupled with a dearth of deep-pocketed lenders, keeps the cost of funds high.
A customer segment that they could potentially address is small merchants, who take short-term loans, often for a day, from moneylenders at high rates. A few startups, in fact, have already started moving to tap the opportunity.
“This will help them create an anchor around which they can develop the business and get more borrowers,” said Rishabh Mastaram, founder of RGM Legal who specialises in fintech sector advisory.
All is not doom in the borrower side; there is enough and more beyond the cities, claimed a P2P platform founder. The idea now is to expand the borrower base to smaller locations where they rely on local moneylenders for credit and end up paying very high rates.
“We are seeing 66% of our loans originating from tier-two and three locations,” said Rajat Gandhi, cofounder of Faircent, which is seen as the largest P2P lending platform in India.
While demand for money is high from far-flung areas, cost of operations also goes up because of document collection, credit checks and other formalities which are yet to become completely digitised.
Where are the lenders?
With the Rs 10-lakh cap that the RBI has imposed on the exposure that a lender on P2P platforms can have at any point in time, institutions, wealthy individuals and family offices have lost interest in the business.
“It is too small a limit for any deep-pocketed investor to come in. Unless P2P becomes an alternative and lucrative asset class, the sector can never grow,” said Dhiren Makhija, founder of Bengaluru-based Cashkumar.
To tap the alternative spectrum, Faircent has taken the bet from the other side. The platform allows people to invest as low as Rs 750 per borrower to start with, and hopes that once they see the returns they will commit more.
But this also increases systemic risk, acknowledging which Gandhi of Faircent said the small lenders might not have the risk appetite or the understanding. Getting too many such players can also be harmful for the overall sector, especially when times are tough, he added.
Middle-class Indians tend to be extremely risk averse, hence selling P2P lending as an investment option to the retail investors is a tough job, said a senior banker.
“There is a need to make Indian consumers aware about risk-based pricing, but for that platforms need to do extensive marketing and awareness generation which require money,” said Rajiv M Ranjan, founder of P2P startup Paisadukan.
Regulatory curbs
The RBI wants to keep a close watch on how the space evolves. By bringing in the Rs 10-lakh cap which was not there in the discussion paper released in April 2016, the RBI has shown that it does not want the sector to explode and create systemic risks for the overall non-banking financing space.
ET has learnt that industry executives have made multiple representations to the RBI requesting relaxation of the cap. Till date, they have not received any specific assurance from the banking regulator.
Many of the top executives ET spoke to pointed out that while on one hand regulation brought much-needed recognition of the financial markets, the limit on the platform, on the other hand, has capped all growth possibilities.
To promote the sector as an attractive investment destination, P2P lending players have also sought assistance from the government on relaxation of tax rules for investors in this space.
“These moves will help the sector attract attention and grow faster,” said Jalan of OML P2P.
But all agree that with strict customer verification requirements, audit checks, regular reporting and prudential requirements, the RBI has ensured that India will not follow the China way where the sector turned out to be a major systemic risk in the economy.
Patel from Lenden Club said the sector would take time to mature. It’s been only a couple of years after all that these platforms have started coming up, he pointed out.
“Just like the NBFC sector has become this big over the last two decades, in another few years the P2P lending companies will also become an integral part of the NBFC space,” he said.
Quality entrepreneurs
Perhaps, one of the biggest positives of the sector could be the fact that most of the founders of P2P businesses are experienced executives of the financial services world.
Surendra Jalan of OML P2P, for instance, quit Yes Bank as a group president to start this business. Rajiv Ranjan of Paisadukan had worked with Bank of America and Infosys for more than 10 years. Rajat Gandhi who co-founded Faircent also had worked for more than 14 years with the Times Group, which publishes this newspaper. Finzy was founded by Amit More, who was previously with Edelweiss and Credit Suisse.
“I do not think the RBI was very keen on getting young early-stage entrepreneurs into the sector who could potentially blow up the space,” said the founder of a P2P company. “It has overall shown the regulator has been conservative in this business.”
But given the status of the industry, there are active interventions needed. Perhaps the RBI will come in as a saviour. Perhaps the founders will have to get their act right find out what they are missing. Perhaps there is just the need for a promotional blitzkrieg by one company backed by VC funds which will make the whole sector visible.
Questions are many, but the answers still elusive. The platforms, meanwhile, vow to keep the fight on, as one of the founders said: “We have nothing to lose. It is not our money that has been loaned out, the only loser will be the sector, hence we all have to keep trying our best.”
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