Peer-to-peer lending grows 10 times in a year

Concerns remain over ethics of earning high returns by lending to financially excluded

Peer-to-peer lending in 2019 grew 10 times on a year-on-year basis. The recognition from the Reserve Bank of India helped, which now regulates the sector under a separate category called P2P NBFC (non-banking financial company).

Last month, Nitin, a college student, earned 22 per cent returns out of his monthly allowances. This was due to the fact that he is a regular investor on peer-to -peer (P2P) lending platforms.

Nitin was attracted to P2P lending through an advertisement that promised 24 per cent returns on unused liquidity “by lending to real people”.

In the past year, no other sector weathered the slowdown in India like P2P lending — platforms that cater to sub-prime borrowers. The sector grew over 10 times over the previous year on a year-on-year (YOY) basis.

This growth was propelled by recognition from Reserve Bank of India (RBI), which now regulates the sector under a separate category called P2P NBFC (non-banking finance company). Further, in December 2019, the regulator relaxed norms by increasing individual lending limit across platforms from ~10 lakh to ~50 lakh.

With no cap on interest rates, one can earn returns ranging between 15-25 per cent annually, or more, by giving small loans to sub-prime borrowers.

However, this unregulated interest rate regime has also sparked a debate over the ethics of earning high returns by lending to the financially excluded. These concerns have been aired even by some players in the sector.

“This is not an avenue to earn high returns. We enable lending to individuals who are financially excluded to sustain their livelihoods. So, it goes against principles of natural justice for somebody to earn 30-40 per cent returns from an individual on such platforms. I had requested RBI to cap interest rates,” said Ramakrishna NK, cofounder, Rang De.

Rangan Varadan, co-founder of Microgram, too, called for a cap. He said, “Each P2P firm has its own model. Most of them are positioning themselves as alternative investment platforms”.

In a typical rural-centric P2P model, a website publishes a list of loan seekers, often financially excluded customers, who meet their credit demands from moneylenders. A prospective lender chooses the borrower of their choice, pays through an online platform and gets monthly or quarterly payments on the loan, with an average return of 16-18 per cent, going as high as 25 per cent.

In some cases, the P2P company ties up with a microfinance institution or non-goverenmental organisation to bring the loan seekers on the platform and monitor the loans. In others cases, they mobilise borrowers and monitor the loans themselves through field campaigns. The P2P platforms retain two to five per cent as a fee.

For a borrower, depending upon the credit profile, the interest rates could be between 12-36 per cent, on a reducing balance, on an average. The phenomenal growth in the sector has also come with increasing risk.

Rangan agrees that collection is a major concern for the industry. There is no credit insurance cover, apart from life cover in some cases. In the latter case, if the borrower passes away, the insurer pays the money. At present, the default rate is less than two per cent.

Rupeecircle, one of the biggest P2P NBFCS, disburses about ~3 crore per month, and has grown more than 10 times in the past year. The average returns for lenders on the platform is about 16-18 per cent, and the company caters mostly to financially excluded people with salaries below ~25000-30000 per month, according to Abhishek Gandhi, cofounder, Rupeecircle. Most of these clients were serviced by moneylenders, who charged even more.

Finzy, a P2P NBFC, a quick personal loan platform, has also grown 10 times in the past year. According to Amit More, founder of Finzy, clarity in regulations helped the sector grow phenomenally. “We are positioning ourselves by showing that P2P is an instrument where you earn EMI, rather than giving EMI,” says More. The company has its own recovery team, and the default rate is 1.02 per cent.

Indiamoneymart, another P2P NBFC, has grown around 300 per cent in the past year. “In the last one year, there has been a tremendous rise in interest among lenders. An investor can expect a return between 16-25 per cent,” says Mahendra Agrawal, cofounder of the company.

As P2P platforms grow by leaps and bounds by giving high returns with moderate risks, it has attracted many novice as well as seasoned investors. However, staying away from greed could be the need of the hour for sustainable growth of the sector.