Firms, for their part, make money from both the lender and the borrower when the debt is distributed. This income comes in various forms. About 100-500 rupees ($ 1.5-7.5) as registration fee from borrower and lender. As charges to facilitate the loan (approximately 4% for borrowers and 1% for lenders). In some cases, the borrower also takes a late payment fee to the lender (40% of what the lender has to pay). All in all, the platforms can earn 7% off each. Factor in the cost of disbursing debt – underwriting, certification, digital acquisition costs, etc. – and they still have a net interest margin of 3-5%.
Most importantly, companies make all their money when the loan is self-distributed. This makes it the only business model in the current market where the company does not have skin in the game. “We are giving money without any capital risk,” said Bhavan Patel, co-founder of Lenden Club.
However, it defaults to the system.
A bad debt means that it has not been repaid for at least 90 days. The 32 lenders we spoke to know all this well. They are all part of the WhatsApp group. Unlike other WhatsApp groups, which are cesspools of “good morning” messages, the only goal of this group is to find out how someone paid or misrepresented borrowers that month.
When repayments do not appear long, the RBI has decided that companies should “assist” lenders in debt recovery. This includes avoiding offenders by giving them calls, visits and legal notices. However, orders are designed to put the risk on the shoulders of individual lenders rather than firms.
However, P2P lending institutions are in a Catch 22 situation. Even if the liability is not on them, lenders will not be able to trust the system unless they can guarantee that it will help them recover money from defaulters. This will result in the verification of creditors.
Former RBI deputy governor R. Gandhi said: “P2P (companies) are not financial intermediaries and cannot guarantee the behavior of the borrower or the lender. He said he was involved in the initial stage of making orders.
Bhavin Patel agrees with this view. “When mutual funds are not responsible for the risk they take on behalf of investors, why should P2P platforms be held responsible for excessive defaults or algorithm failure? This is the risk the lender takes against such high returns,” he said.
Ashish Bansal has learned this the hard way. Bansal is not an easy mark. A savvy angel investor, he is CIO of Travel Tech Company. He understands the power of tech, so he decided to bet on P2P loans. He was impressed with the data-led approach the markets had to analyze credit-worthy borrowers.
He has been a lender since 2015 and has pledged not to return to these platforms ever since. Bansal has issued 52 lakhs ($ 76,117) to 125 borrowers through four of India’s top P2P lending institutions. More than half of his borrowers defaulted. However, none of the companies he offered filed zero legal cases. He filed four legal cases for himself in August 2017. They do not show signs of resolution.
The default settings
The first piece of advice for lenders is to mock their portfolios by diversifying their loans into different categories of borrowers.
Bansal, however, charged an average interest rate of 28%. This exposed him to high-risk borrowers. “If you lend more than 30% to the highest interest group, the defaults are 10%. But because you are charging 30% interest rates, you have to make your money back with 18% risk-adjusted returns, ”said LexBox CEO Ekmeet Singh. Bansal’s return of $ 66.5 lakh ($ 97,343), including interest, was only $ 23 million ($ 34,150).
But the problem is not limited to the high-risk category. A lender, sarcastically the moneylender, he lent at a moderate interest rate of 18%, also enjoying high default rates. He told Ken that he had loaned Rs 80 lakh (7 117,104) to 200 borrowers. 35% of them never paid him back.