A review read “Investors Beware…” on the Facebook page of peer-to-peer lending company Faircent. Instead, the comment has a one-star rating.
Another review shouted, “You can’t get your money back if you invest through these people.”
This was followed by positive comments with Five Star ratings.
Pattern is clearly among Faircent’s 196 reviewers. Those who love the service are borrowers who have had no trouble getting a loan. Disgruntled One-Star reviewers wait for lenders to get their money back.
These reviews signal not only Faircent, but also India’s peer-to-peer (P2P) lending scene. The companies involved – Faircent, LendBox, Lenden Club, i-Lend and i2Finding – are online platforms that connect borrowers with lenders. The idea behind the P2P debt concept is to invest in gold, property, fixed deposits, equity and mutual funds and create a new savings instrument. But within three years, cracks in the business had already begun to show.
Ken identified a group of 32 lenders – mostly businessmen and savvy investors – who were attracted by these companies with 25% plus returns that could be unlocked by lending. Today, they are not happy. They do not commit themselves to defaults. Of the 32, 18 lenders disclosed their portfolio details to The Can; Things are not pretty. Between them nearly 2,500 people owed Rs.4.3 crores (31 631,656). 26% of borrowers defaulted. With this in mind, consider personal loans, which are issued without collateral, just like P2P loans. According to bankers, these are an average default rate of 4% and maximum defaults are still only 10%.
Over the past three years, the market space has shrunk as the needs of the borrower have become more important than the lender’s. As a result, 32 lenders have talked about Ken withdrawing from these marketplaces in the past year. But unlike new-age lenders who lend money from depositors’ money, or co-lend with non-banking finance company (NBFC) or banks that raise money for lending, this model must ensure that it has a consistent supply of lenders on the platform. But with the lenders’ situation far from ideal, what is the future for India’s P2P lending institutions?
Why should banks enjoy all
At the moment, P2P loans are still small in size, with only Rs343 crore ($ 50 million) being distributed annually, industry insiders said. With the market growing at a rate of 20% per month, the Reserve Bank of India has recognized the industry. It created regulations for it in October 2017, creating a special class of licenses for non-banking financial peer to peer lending (NBFC-P2P) for P2P lenders. Currently, only Faircent has an NBFC-P2P license. Other companies said they had applied for licenses and were waiting to get one.
It’s easy to believe in these companies – when banks make credit decisions based on information such as sibil scores, bank statements, payslips and past defaults, why can’t anyone else do it?
“Data is what makes banks lending, but data is now democratized. The bank has all the information available to the lender,” said Faircent CEO Rajat Gandhi. Companies like FairCenter are working with their algorithms By analyzing why Sybil low score of the borrowers, the banks find that they were confident that the chances of missed debt.
The people are Indian
According to a 2018 report by credit information company TransUnion Sybil, there are over 150 million Indian consumers who are eligible for credit but are not eligible by banks. This is a pool where P2P lenders can find borrowers for their platform.
These borrowers belong to the salaried class. But salaried people who are turned over by banks because they are working in a small company or are still in their first job. They may have a lower credit score from a credit rating bureau like Sibyl. But where banks look at duds, P2P lenders see the potential.
After this, the process is simple — borrower applications are examined to select credit-worthy ones from the entire pool. Approved borrowers are classified as low-risk, medium-risk and high-risk. The worse a borrower’s ranking is, the higher the interest on the loan. These rates are 12-15% for low-risk, 16-20% for medium-risk and 25% for those in the high-risk category. Lenders, on the basis of their risk appetite, are paired with borrowers.