While the Indian startup ecosystem was celebrating the news of Capital Float raising $25 million in a Series-B round and the Fintech world expecting bigger and better news in the days to come, elsewhere, the Alternate Lending (read P2P lending to be more precise) Industry was witnessing harsh times, probably its worst fortnight. Let’s start by looking at some of the recent happenings:
These are not just news clippings regarding the top alternate lending companies in the US (and potentially across the world), but they are shock-waves which could lead to drying up of investor money across all such platforms – both equity capital and lending capital which helps in securitisation of loans. Private Equity funds and Hedge Funds are typical investors on platforms like LendingClub and Prosper, and with these already showing signs of caution, platforms would need to look for a longer term source of capital for selling loans, and inability to do so may result in higher rates being passed on to the borrowers or a drop in loan originations.
Two key questions arise:
The answer to both the above questions is linked to the theory – there is a life cycle that every industry goes through. The US Alternate Lending Industry is going through the same life cycle. This life cycle has now reached the stagnation point. The Indian Fintech Industry is following a much slower and less steep growth curve. The result being that the impact, though might be felt in investor confidence coming in slow and steady, but would not hurt the players who are coming out with the regulatory and legal aspects in place, have a solid understanding of Credit Underwriting in the Indian context and are using technology to drive value and improve processes, not just in Underwriting, but also across Operations, Acquisitions and Collections.
Concerns are already being raised about the technology-driven underwriting for unsecured loans in times when the unemployment rates could rise and credit may deteriorate. Only time will tell whether the market leader and the face of the Alternate Lending Fin-Tech world has triggered another financial crisis or whether it is just another passing phase. But one thing clearly stands out – companies having skin-in-the-game, doing originations on their balance sheet, or following a hybrid model like Avant, which, as per the CEO Al Goldstein, is the only cash-flow positive company because of the yields they make on loans they originate on their own balance sheet, are going to be relatively unaffected compared to the pure P2P players.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)