India has had a long tradition of community-based financing and lending in the forms of chit funds, thrift societies, community associations, and co-operative societies extending credit to its members and participants. These unorganized sectors have been necessitated by the lack of access to bank credit. It is estimated that India may be one of the biggest offline peer-to-peer (P2P) lending markets in the world, as nearly 50 per cent of all credit is circulated amongst friends, families, and communities.
But things are changing. The recent years have witnessed the emergence of pioneering technology-enabled P2P lending platforms such as Kiva.org, Rangde.org, Milaap.org and Faircent.com.
Most of the initiatives have been in the philanthropic or bottom of the pyramid (BoP) sectors, wherein they have been about helping the large poor and unbanked population of the country. On the other hand, we at Faircent.com are a P2P lending marketplace, which caters to the increasing and substantial urban middle-class, both as a source of cheap credit and a lucrative investment option.
In India, technology-enabled P2P lending is at a nascent stage, with companies entering this arena only in the last few years. The adoption and reception, however, have been tremendous from the public. A rough estimate would peg the technology-enabled P2P lending market in India at about more than $4 million. In the last eight months, Faircent’s market place has had over 1500 lenders committing nearly $2 million and some 6500 borrowers seeking over $3 million. What is fuelling this frenzy? There is a strong user case at both the borrower’s and lender’s end, which is illustrated from the following two live cases on Faircent.com:
Case 1 - Lender: Soumitra Das, who works as a business development engineer with Avnet Technology Solutions resides in Bangalore. Through Faircent, he has loaned Rs. 74,000 to three borrowers namely; Mahender Singh from Delhi, and Prashant Nayak and Mohan Rao from Bangalore. He has loaned the sums of Rs. 14000, 30000 and 30000 respectively, at 18 per cent per annum. Earlier, he had invested the same amount in a long-term fixed deposit at 8. 75 per cent with HDFC Bank. But through Faircent, he makes an incremental earning of nearly Rs. 6000, which is 8 per cent higher than any bank deposit.
Case 2 - Borrower: Prashant Nayak, an AGM with Asia Pulp and Papers residing in Bangalore, required Rs. 100,000 for his child’s medical treatment. He was offered loans at more than 23 per cent from private banks like ICICI Bank and Axis Bank. He reached out to Faircent, and his loan was approved and within days he received bids from five lenders namely: Sadanand Mishra, Malini, Samarth Financials, Soumitra Das, and Mr. Piyush Ranjan offering the loan at 18 per cent. Prashant saved nearly 5 per cent points on his loan which resulted in a saving of nearly Rs. 5000.
Of course, every investment comes with underlying risks, and P2P investments like any other investment can go bad. Therefore, P2P lending firms have to invest heavily in technology and big data-enabled underwriting algorithms, which go beyond standard credit bureau reports, and incorporate social data from the borrower’s LinkedIn and Facebook profiles. This information helps the firm’s algorithms to accurately predict the risk associated with every borrower. But the key to mitigating risks on P2P lending platforms is to build a diversified portfolio of borrowers. In the eventuality, if a borrower defaults, we at Faircent help the lenders in recovering the money through the legal process.
Impact for India
India needs about a trillion dollars in investment to ramp up its infrastructure in the next few years. If the general population can do a better job of lending and financing each other under a robust system, it potentially frees up funds for nation building. P2P lending is a transformative new technology that could simultaneously reduce cost and increase access to capital. This would be a boon in a capital-starved country like India.
As a generation that collaborates, shares, and reinvents on a daily basis, crowd financing helps weave in infinite and largely untapped resources. What's the true potential of crowd financing in the country? The answer is still evolving.
About the Author:
Rajat Gandhi is the Founder and CEO of Faircent.com, India’s leading peer-to-peer lending marketplace. Rajat will talk about the current status of crowd finance in India at the largest global meet on crowd economy, crowdsourcing, and crowdfunding - Crowdsourcing Week Global 2015, in Singapore, from April 20-24. Register and follow the conversation at #CSWGlobal15.