Peer Pres­sure

New RBI reg­u­la­tions have cre­ated a flut­ter in the P2P mar­ket.

Business Today - - FINTECH SPECIAL | P2P LENDING - By Anand Ad­hikari Il­lus­tra­tion by Raj Verma

IN JUST SEVEN YEARS, the Chi­nese Peer to Peer (P2P) in­dus­try emerged as the largest in the world, with 3,000 P2P plat­forms with lend­ing book of around $500 bil­lion.

Even as the suc­cess of China’s P2P lenders in­spired en­trepreneurs glob­ally to fol­low suit, the past year has been ex­tremely chal­leng­ing for Chi­nese P2P lenders.

Fed up with in­dis­crim­i­nate growth, in­stances of fund mis­match, gov­er­nance is­sues, frauds, and some plat­forms even run­ning as Ponzi schemes, Chi­nese reg­u­la­tors clamped down with stiff reg­u­la­tions. The new reg­u­la­tions are re­strict­ing the growth of P2P plat­forms in China, now.

The Un­reg­u­lated Days

Closer home, the Re­serve Bank of In­dia, or RBI, re­leased the reg­u­la­tory frame­work for P2P plat­forms last Oc­to­ber. In­dia is also wit­ness­ing a rip­ple ef­fect in the in­dus­try, sim­i­lar to what was seen in China. Though the do­mes­tic P2P plat­form busi­ness is much

smaller, it does hold huge po­ten­tial since a large chunk of the pop­u­la­tion is not served by tra­di­tional banks.

When the RBI guide­lines came in last year, there were close to two dozen play­ers op­er­at­ing as tech­nol­ogy com­pa­nies reg­is­tered un­der the Com­pa­nies Act.

Three years back when P2P play­ers started in In­dia, there were no guide­lines, and dif­fer­ent mod­els emerged. A pure, un­se­cured lend­ing model where lenders ex­tended money for de­ploy­ment as un­se­cured per­sonal loans. An­other where play­ers of­fered guar­an­tees (in­clud­ing prin­ci­pal pro­tec­tion) to lenders for rout­ing funds for lend­ing un­der the plat­form. A third, where pro­mot­ers or other share­hold­ers brought in eq­uity and other funds for P2P lend­ing us­ing their own bal­ance sheets.

At that time, there was no re­stric­tion on the amount that lenders and bor­row­ers could con­trib­ute or avail un­der the plat­form. Lend­ing ranged from ` 50,000 to a crore.

Most in­vestors were small NBFCs, high net worth in­di­vid­u­als, or traders look­ing for high re­turns; and the bor­row­ers were get­ting any amount they wanted with no lim­its. Many plat­forms were lend­ing to SMEs and MSMEs that were in ur­gent need of funds.

Life After Reg­u­la­tion

After the RBI guide­lines, there is fi­nally some clar­ity on what de­fines a P2P – it can only be run after se­cur­ing an NBFC li­cence from the RBI - run strictly as a busi­ness of un­se­cured lend­ing. A lender can con­trib­ute a max­i­mum of ` 10 lakh. A bor­rower can­not take more than ` 50,000 from a sin­gle lender but can take a max­i­mum of ` 10 lakh spread across 20 lenders. (See RBI's P2P Guide­lines).

This makes P2P lend­ing more dif­fi­cult and com­plex. “You have to lend to mul­ti­ple bor­row­ers from a sin­gle lender on a con­tin­u­ous ba­sis. This needs a dif­fer­ent set of skills at the back­end in­clud­ing a tech­nol­ogy plat­form and op­er­a­tional ex­per­tise,” says Ra­jat Gandhi, the founder and CEO of Fair­ that stakes claim to be­ing In­dia’s largest P2P.

Sev­eral pro­mot­ers said the RBI’s stip­u­lated IT in­fras­truc­ture is some­thing that a ` 500 crore plus NBFC re­quires. For P2Ps, the min­i­mum net owned funds limit has been set at ` 2 crore.

Most P2Ps can’t af­ford to set up a net­work at th­ese prices. In ad­di­tion, the stiff pru­den­tial re­quire­ments are forc­ing ex­ist­ing play­ers to abort plans or are forc­ing ex­ist­ing play­ers to stay away from tak­ing li­cences. Only 15-odd com­pa­nies ap­plied. Those that dealt with com­mu­nity lend­ing or chit fund kind of ac­tiv­ity have de­cided to stay away for now.

Get­ting money will be a chal­lenge now with the re­stric­tion of ` 10 lakh for in­vestors lend­ing to P2Ps. Play­ers in this sec­tor will have to reach out to more in­vestors.

And while P2P play­ers are eye­ing mu­tual fund in­vestors as po­ten­tial lenders, bank­ing ex­perts say there are trust is­sues be­cause many P2P play­ers are un­known brands and lack in­sti­tu­tional back-up mech­a­nisms.

The mu­tual fund in­dus­try took decades to se­cure in­vestor con­fi­dence and P2P is the new kid on the block. But play­ers say there’s no dearth of lenders. “In­vestor ed­u­ca­tion is the need of the hour. We also have the RBI reg­is­tra­tion, which serves as a com­fort fac­tor for lenders/ in­vestors,” says Founder and CEO of LenDenClub, Bhavin Pa­tel.

Pramod Ku­mar Akhramka,

“You have to lend to mul­ti­ple bor­row­ers from a sin­gle lender on a con­tin­u­ous ba­sis” Ra­jat Gandhi CEO and Founder Fair­cent

Founder of plat­form OMLP2P, says it would ini­tially be the abil­ity of the plat­form to at­tract funds from the mar­ket. If P2Ps de­liver the promised re­turns, then funds would come later. As far as bor­row­ers go, there is no dearth as long as there are com­pa­nies will­ing to lend.

There is a huge seg­ment of bor­row­ers — first time salaried class (peo­ple with salaries of ` 5,000 to

` 15,000) ne­glected by SMEs, MSMEs and the bank­ing sec­tor. Small bor­row­ers are not served prop­erly, says Suren­dra Ku­mar Jalan of OMLP2P. Cit­ing the ad­van­tage of lower costs (while the bank­ing sec­tor pays huge reg­u­la­tory costs), Jalan says the chal­lenge is find­ing the right bor­row­ers.

Mean­while, P2P play­ers, re­spon­si­ble for KYC, will need strong man­age­ment teams backed by bankers, a good board, and sys­tems and pro­cesses geared to­wards suc­cess. They’ll have to write the right loans so that they don’t need to chase bor­row­ers for re­cov­ery of funds.

Post 2008, many NBFCs shut shop be­cause of small ticket, un­se­cured loans; and larger NBFCs like Ci­tiFi­nan­cial and Fuller­ton had to change their busi­ness model. The big­gest risk for P2Ps is the prod­uct con­cen­tra­tion in un­se­cured per­sonal loans. In ad­di­tion, the cost of op­er­a­tions in deal­ing with low-cost loans is very high. That is one of the rea­sons why banks and NBFCs stay away from such loans. How­ever, P2P play­ers re­duce costs greatly by us­ing tech­nol­ogy.

To­mor­row if vol­umes grow, the cost also re­duces. Banker say phys­i­cal re­cov­ery is the big­gest lim­i­ta­tion. Funds mon­i­tor­ing (in case of a de­fault or late pay­ment) re­quires a bank­type phys­i­cal net­work of branches in district, talukas, and vil­lages. “We are look­ing at ap­point­ing agents or a part­ner kind of model all over the coun­try,” said one P2P player.

The most com­fort­ing fac­tor is the manda­tory shar­ing of credit in­for­ma­tion by P2P play­ers with credit bu­reaus. “Ear­lier, there was no re­quire­ment for P2P play­ers to share in­for­ma­tion with credit bu­reaus, but now this has been man­dated by the RBI. Nat­u­rally this will lead to de­vel­op­ing a healthy credit cul­ture,” opines Ra­jiv Ranjan, Founder of Paisadukaan, the first P2P player to get li­cence un­der RBI's new guide­lines.

While P2P play­ers say they are not ac­cept­ing any bank like de­posits and lenders/ in­vestors who have risk ap­petite are ready to lend to risky cus­tomers in the mar­ket, there is no risk to the fi­nan­cial sta­bil­ity of the fi­nan­cial mar­ket should some­thing go wrong.

In In­dia, the de­faults rate is 5- 6 per cent, but the size is also small. China, with big­gest P2P lend­ing, has seen in­stances of frauds, fund mis­matches, and also gov­er­nance is­sues.

Ex­perts ad­mit that In­dia can see higher de­faults if we scale up and the econ­omy also sees some chal­lenges - higher in­ter­est rates, lower growth and so on. Plus, this is a sys­tem with link­ages to In­dia’s fi­nan­cial sys­tem. The RBI is go­ing to watch the P2P plat­form very closely.

“Ini­tially it's the abil­ity of the plat­form to at­tract funds from the mar­ket. If P2Ps de­liver the promised re­turns, funds would come later.” Pramod Ku­mar Akhramka Founder, OMLP2P

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