According to the International Finance Corporation, the Indian MSME sector faced a credit shortfall of nearly INR 15 trillion, largely caused by the inability of the legacy BFSI sector to cater to it.Surendra Kumar Jalan
For the most part, MSMEs lacked the kind of transactional history, liquidity, collateral, and documentation that most institutional lenders required to formulate a credit score, let alone approve an application for a loan. Even for young Indians setting up new lives and new homes, their late entry into the formal banking system often precludes their ability to access credit. In such circumstances, many people in the past used to turn to moneylenders who charged perniciously high rates of interest.
India’s nascent P2P industry, driven by cutting-edge technologies, is looking to enable finance to the country’s financially excluded, and the recent RBI guidelines have only given them a solid shot in the arm. RBI’s Guidelines on P2P industry and asking them to get Certificate of Registration as NBFC-P2P has created a sense of confidence in the mind of Lenders and Borrowers as well as Equity Investors to invest in this industry.
Following a long process of consultation and industry outreach that took nearly a year, the RBI issued a notification followed by directions, which has created a new regulatory framework for P2P players to adhere to. These P2P players will be treated as NBFCs, and subject to the regulations that apply to them in general. Specifically, they are required to be registered with the RBI, are subject to comprehensive disclosure requirements, and will now be placed under a new dispute redressal mechanism.
These measures bring greater awareness, reliability, and legitimacy to this sector. But to appreciate the positive impact that RBI’s guidelines will have, we have to examine how P2P lenders are looking to disrupt the credit ecosystem of the Indian economy.
These new-age fintech players are deploying AI-driven algorithms that can use alternate sources of data to determine the creditworthiness of applicants, defraying the need for a long transactional history. The data analytics that these companies use are known to be fast, accurate, and reliable; by providing this information to potential lenders on a platform, P2P lenders are given a much greater assurance of returns than before. Thus, with the risks more clearly known, a smart investor can use P2P lending as a new asset class.
These platforms allow lenders to diversify their risk by distributing their money to various different borrowers, and multiple borrowers collaborate for each credit transaction. These are all processes that have been seen to work globally, where P2P lending has made inroads into becoming part of the financial mainstream. The volume of global P2P lending was approx USD 65 bn in 2015, which is likely to grow to at a CAGR of 50%... In India, the sector disbursed an estimated credit value of USD 4.5 million in 2016 and is expected to disburse USD 5 - 10 billion by the end of 2022-2023.
Given that the technological process being deployed by P2P players is an unfamiliar one, the RBI’s welcome move serves to recognize their value and make them an important stakeholder in the Indian economy and its growth story. Credit is widely recognized as being the fundamental currency required to drive growth, and legitimizing P2P players are likely to increase the volume of money being pumped into that sector of the Indian economy. The regulations will help assuage any doubts or fears MSMEs might have, and enable access to a lucrative credit source.
The new regulatory recognition will also help these companies raise their profile in their search for funding and investment, which will be instrumental in these companies scaling up in the coming years. As these platforms and players gather momentum, they will draw upon larger numbers of borrowers and lenders, creating an alternate credit ecosystem. This alternative to the legacy banking sector, driven by cutting-edge technology that provides greater accuracy, will allow the savings of the Indian economy to be repurposed into fuelling its growth.
The RBI has opened the doors to a new way for people to access credit and unlocked the potential for future growth and prosperity. The RBI’s recognition has also helped in the financial inclusions of the masses, who were deprived of credit for a long time.