There has been a lot of debate on the merits and demerits of demonetization. The subsequent cash crunch has forced people to use some form of electronic mechanism to make or take payments. The use of electronic money leaves digital imprints and helps build financial history. This is good news for the small & micro businesses (MSME). By giving access to their financial data the MSME will be able to consume a variety of financial products, including access to cheap and easy loans to grow their business. If the business grows, MSMEs become SMEs, additional jobs get created and India’s growth story gets a shot in the arm. To me lending to the under-served or un-served small business is financial inclusion & the journey has just begun.
Why will financial inclusion grow rapidly in India?
1. Mobile & Internet penetration: India is seeing an explosion in mobile & Internet connection. The Internet mobile network is practically accessible to a large part of the Indian population & is continuing to grow. According to a report by Counterpoint research, with 220mn users, India has become world’s 2nd biggest smartphone market, leaving US behind. Also, as per 'The Future of Internet in India' report by Nasscom and Akamai Technologies, buoyed by Internet penetration in rural areas, the number of web users in India will see a two-fold rise at 730 million by 2020 against 350 million at the end of 2015. So the playing field is ready.
2. India Stack: India stack is a part of Digital India program aimed at treating information as a utility. The government has launched an open Application Programming Interface policy which uses Aadhaar for authentication, electronic generation of KYC, digital lockers, e-signatures and Unified Payments Interface or UPI. India stack makes the process of doing business over the net faster, smoother, safer and cheaper.
3. Falling interest rates: Digital data will put pressure on the interest rates. With mobile and internet penetration increasing and doing business over the internet becoming more acceptable, accessing funds over the net would be far more efficient and cheaper than traditional means. The traditional loan sharks will not be an option for the MSME as organized players will be able to extend credit at cheaper rates. This has already started happening. Worthy borrowers can get loans on P2P lending platforms at upto 4% lower than the interest rate offered by banks.
4. Growth of alternative investment: Also, while many expect interest rates offered by banks against loans to drop in the future, returns offered on deposits are also likely to continue their downward trend. Already in the last month the maximum return against fixed deposit offered by banks has dropped by 2%. Hence, many will have idle funds lying in banks not giving any good returns. These people will be on the look-out for alternative investment opportunities that can help them make greater returns from their idle funds. Some of this money will move to online digital platforms for better returns.
P2P lending and MSMEs
Herein lies the opportunity for P2P lending. Peer-to-peer lending directly brings borrowers with fund requirements in contact with lenders with surplus funds through tech-enabled platform thereby eliminating intermediary cost. This benefit gets passed on to the borrowers (who get loans at lower interest rates) and to lenders (who can make higher returns on their idle funds)
Today, P2P lending platforms are delivering gross returns of up to 18% p.a to a smart lender, who is building his portfolio across borrowers from diverse background and risk buckets.
With better records of financial and credit history, it will become easier for P2P lending platforms to list fund requirements of this traditionally ignored sector of MSMEs at competitive interest rates. Tech-enabled innovations will further boost quality and service of transactions. With increased lender interests, funding such requirements will become faster and easier. Not only does it offer lenders better returns, but it also provides financial support to MSMEs thus boosting India’s growth story.
The Way Forward
Many governments worldwide have realized the importance of P2P lending especially in easing the pressures on traditional financial systems and its contribution in making available cheaper and faster funds to every sector of the economy. Already over-leveraged banks further burdened by NPAs are opting for stricter regulatory capital requirements, and in the process reduced lending especially to high risk category investors like MSMEs. 78 percent of SMEs/MSMEs debt demand, is fed through informal sources and self-finance while formal sources cater to just over 22 percent of the demand. (Source: IFSC Report) Thus, a huge void to meet the credit needs of the economy exists and other players, especially P2P lenders, can step in and help fill this.
Last year, UK Govt. announced tax relief on risk-adjusted net income earned through lending on P2P platforms. Such measures don’t just boost investor confidence in the model but also encourages lenders to actively seek out the under-served sectors like MSMEs to bring about a positive change in the economy.
Last week, UK government has given peer-to-peer lending platform Funding Circle an extra £40 million to lend to small businesses. The funding comes from the state-owned British Business Bank and means the total cash invested by the UK government on Funding Circle's platform is now £100 million. The British Business Bank committed £60 million to the platform in 2013. Indian government also needs to aid this movement towards financial parity with active participation in lending through this latest but most disruptive financial innovation of our times.
RBI guidelines for the P2P lending sector expected by next month, will hopefully herald a new dawn in financial inclusion.