Rise of startups in online lending (peer to peer lending)

Gulzar points to this interesting story from ET on rise of online lending platforms. They are also called as peer to peer lending platforms. Here the platform connects the  borrower with the bank after doing a good check on the borrower using data analytics and so on.

Investors feel that the vacuum left by the traditional banks in terms of not meeting the financial needs of consumers satisfactorily has led to the proliferation of such startups. Financial technology businesses, they contend, are disrupting traditional banking channels by making financial products and services more accessible and convenient to consumers who have been ignored by banks.

“The use of alternative data and analytics is enabling fintech startups to reach underserved consumer segments while enhancing credit underwriting capabilities, which will ultimately lead to lower delinquencies for lenders,” asserts Siddharth Parekh, cofounder of Paragon Partners, a mid-market private equity fund. Parekh maintains that traditional lenders such as banks and NBFCs have relied on credit bureau data and scores, which sometimes can be inaccurate or misleading.

Credit bureaus such as Cibil map the financial score of individuals which is used by the banks to assess the credit worthiness of the borrowing consumers.

Those with less than 750 out of 900 are usually shunned by banks. “Less than 20% of Indian consumers actually have a Cibil score and many potential borrowers are unaware of their credit record and its implications on seeking new loans,” adds Parekh, an investor in IndiaLends and an angel investor in the fintech space. The financial tech startups, he says, are trying to evaluate credit risk using a wide variety of consumer data including the digital footprint of customers arising out of social networks, ecommerce, mobile usage and geo-location.

Startups like IndiaLends do not lend money of their own. Using their technology platform, they connect consumers with banks and financial institutions which results in better rates for the borrowers and a reduction in overall default rates. “However, where we differentiate ourselves from the bank is in scientifically matching the right borrower profile with the most relevant lender and hence reducing inefficiencies that lead to lower loan approvals, higher interest rates and sub-optimal loan amounts,” maintains Chopra, who cites an anecdote to explain that differentiation.

The article discusses regulatory aspects of such lending, reasons for rise in P2P lending and so on.

For their part, online loan aggregators question the feasibility of the P2P model in the country. “Structurally, P2P lending does not make sense for India given the low spread between the risk-free rate and the borrowers expected rate,” says Chopra of IndiaLends. However, Gandhi of Faircent dismisses all negative talk around the P2P lending model. He says that it’s a legal business, which is not regulated.

“But not every business is regulated in India. Real estate is a classic example,” he points out, adding that he has been engaging with the RBI and updating it on the progress of P2P lending in India. Gandhi maintains that P2P lending is for those who understand that it is a riskbased product. “We believe only sophisticated investors who understand products like mutual funds and stockmarkets should invest,” he maintains. “Banks in India have enjoyed super profits from lending; now individuals too can enjoy similar returns.”

Actually all these P2P networks are a variant of the indigenous banks. These were types of Indian banks which were different from British banks in terms of organisation. They were run by individuals and not in any corporate form which brings its own set of issues. They lent based on a much better understanding of their customers and did not have all this paper work and hassles. Just that they lent from their own capital as formal banking had still not penetrated the country.

Infact LC Jain in his thesis on indigenous banking had suggested not letting these banks go away. He said they should be connected to the joint stock banks and facilitate lending at a local level with which latter are likely to avoid. The govt and regulators tried to get indig banks on board but failed in the process. And now thanks to technology this linkage is indeed happening..



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