How tech-enabled alternative lending is bridging the gap between online and offline credit systemsRajat Gandhi
Out of the USD 2.61 trillion that the Indian economy is worth, the share of institutional credit alone is USD 1.2 trillion, signifying a potentially massive credit market that follows closely behind those in the US and China. Yet, with nearly 70 percent of the population underserved by institutional lenders, this huge opportunity has been largely untapped till now. This is because, for the longest time, lending was dominated by brick-and-mortar financial institutions like banks and non-banking financial corporations. The scenario in the present times, however, seems to be changing for the better.
What the credit systems of the past looked like before technology
Traditional lending institutions, while catering to various borrower segments, have faced major constraints with regards to expanding the scale of their operations due to high costs and resources that they must spend on acquiring borrowers. Adding to these limitations is the fact that the credit assessment methodologies used by traditional players in the sector rely heavily on old models. The focus on collateral-driven lending and the lack of unsecured credit avenues by traditional lending systems have further enlarged the gap between the demand and supply of credit in the country.
As a result, a large number of borrowers are forced to seek credit from unorganised lenders who charge prohibitively high-interest rates, which these consumers have no option but to pay if they are to avail credit.
But, over the past couple of years, the Indian lending industry has been at the centre of a massive technology revolution. The emergence of online lending as an alternative to older credit models has created several major opportunities for nearly two-thirds of the country’s population. Alternative lending models such as marketplace lending, crowdfunding, and peer-to-peer (P2P) lending have registered great traction over the last few years; more than 225 online alternative lending start-ups are currently operating within India, hoping to capture a significant share of the country’s growing credit market.
How online P2P lending is revitalising the credit market
A large number of individual borrowers, as well as small and medium enterprises (SMEs), have been grossly underserved by legacy players who neglect these consumers simply due to their lack of a credit history or low credit ratings. P2P lending does not rely on these antiquated methods of assessing borrowers’ creditworthiness. Digital P2P lending platforms also connect investors directly with borrowers and eliminate the involvement of intermediaries, such as banks and NBFCs. This minimises the complicated paperwork and long standby time faced by borrowers and lenders.
Let’s see how alternative lending is transforming the Indian lending landscape, and why it is rapidly becoming the preferred option for both borrowers and lenders:
Digital/online delivery of services
Alternative lending companies operate chiefly through digital channels like web or mobile applications. As a result, the overhead costs required for maintaining and staffing a physical establishment are circumvented. These benefits can then be passed onto borrowers in the form of lower interest rates and loan processing fees, and to lenders in the form of better margins and returns.
Algorithm-driven underwriting systems
Since the basic principles of lending and risk apply to online P2P lending as well, leading platforms ensure that the lender’s risk factor is reduced to a minimum. Borrowers signing up on the platform undergo a stringent underwriting mechanism driven by advanced data analysis of their personal, professional, social, and financial details. These details, once verified, are published on the website for lenders to view.
Comprehensive assistance to users
Lenders are guided through the entire process and even advised to diversify their investments among different types of borrowers to reduce risks and maximise returns. Similarly, borrowers are spared the need to submit multiple documents and physically present themselves to a credit officer and benefit from swifter loan disbursement.
Bringing offline lenders online
Alternative tech-driven lending is attracting traditional offline moneylenders to extend credit to consumers through online P2P lending platforms. Traditional moneylending operations are typically limited to a specific geographic area; offline lenders need to personally assess the borrowers they are lending their money to and have limited, location-based resources to gain this information. With a P2P platform, this is no longer a limitation.
Traditional moneylenders get detailed information about borrowers located across India, which is sourced from multiple data points by analytics algorithms deployed by P2P lending platforms. With all of this information at their disposal, it becomes easy for money lenders to increase the scale and reach of their business, while keeping the cost of lending to a minimum.
Newer avenues of credit for the MSME sector
Online P2P lending has the potential to revitalise the economy by supporting the oft-neglected MSME sector. By providing them with access to quick and affordable credit, it can drive greater growth for MSMEs across India. This will directly help in creating more jobs across various industries and sectors, and aid the overall growth of the economy.
Alternative technology-driven finance products also hold great promise for the unbanked, marginal population, providing consumers in Tier-II, III, and IV locations with a reliable source of finance for their personal, business, or educational requirements. Furthermore, tech-enabled financial and lending products such as P2P lending are not just for borrowers, but are also an emerging asset class for investors, having received a stamp of approval from the Reserve Bank of India itself.
On the back of such promising developments, as well as the growing smartphone and internet penetration in the country, online P2P lending is expected to become a market opportunity worth $4-5 billion by 2023. Constant innovation and investment in technology will be critical for the alternative lending sector to realise this potential and to meet the growing demand for credit of more than 600 million Indians.
Rajat Gandhi is the Founder and CEO of Faircent, India’s largest peer-to-peer lending platform.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)