Regulation is mostly said to have a throttling effect on innovation while innovation is the foundation stone for the peer2peer lending story in India. With nearing 1 billion INR in loan disbursed, 15-20 odd fintech players making their presence felt and thousands of borrowers/ lenders gaining from this ecosystem, it is a next best story after payments for Fintech players!
To us though, P2P lending is a much more impactful story with a lot to unfold in future! Here is why we believe its criticality:
- Payment was a ‘accessibility’ challenge which Fintech players made it ‘accessible & easy to use’ while P2P lending addressed ‘availability’ challenge as marginal, low threshold, non/ under rated people wasn’t a sought-after segment for the bank. Loans were not ‘available’ to them!
- Fintech in payment is more an extension of the banking ecosystem bridging the gap between banks & customers through innovative use of technology while P2P is creation of a separate ecosystem of ‘alternate finance’ to banks
- The P2P lending players are just scratching the surface today…literally! The potential is huge and is only going to become larger with increase in internet penetration and digital maturity!
It is this criticality or impact that P2P lending has, that makes it important to discuss the necessity of regulating these players. Though their size & scale is still small to be of systemic importance but the criticality & potential makes it a fit candidate for a worthwhile discussion on regulations!
Before deep dive further, let us define P2P lenders as those who provide a marketplace / technology platform where borrowers & lenders can come on board to take or disburse loans.
The role of the P2P players (lenders is a wrong word to use as they do not lend but facilitate) can sometimes include additional services such as providing statements, following up on payment/ recovery etc. at an additional service charge. They do not earn from interest rate floats (main difference from banks) and generates income from the service charges that lenders/ borrowers pay for availing the platform.
They are not definitely modern day money lenders as first they do not lend, secondly they do not maintain any collaterals and thirdly they do not have the same power which typically a money lender can wield over a hapless villager because of the close ecosystem of a village.
So, can this ecosystem self-regulate itself and remain self-sustainable? To understand the same, we looked at a few key influencing parameters:
- Transparency: Are they sharing publicly key data/statistics on their business? E.g. volume of loans, bucket wise loans, Loss rate, ROI etc. or whatever data gives a glimpse of the health of the business they are running
- Charges: Are the charges similar or different players have different business model? Is it more lender friendly or more borrower friendly?
- Interest/ APR: What are the average returns that are being advertised by these players to lenders? Are the returns sustainable or run the risk of putting the borrower in a more distressed condition post disbursal?
- NPA/ Defaulter data: Do they share the current loss rate/ NPA? Do they share defaulter data publicly? Is there a chance of a borrower just hopping from one platform to other (after defaulting etc) to take advantage of lack of credit information sharing across these players? This is important because most borrowers in such platform will have no/ weak CIBIL scores and most players have their own credit appraisal engine and does not use CIBIL
- Data Integrity: Banks because of the regulation has tight control on customer data (& still we see leakage resulting in frauds). Can the P2P players ensure similar secrecy on customer data? Will all play by the ‘self-regulated rules?’
To understand these, we analyzed around 15 key players in Indian P2P ecosystem. The below table provides a snapshot of key data that we could capture from their websites. Pls. note that this is what is visible to anyone and does not require to be registered.
- 60% of the P2P players are ‘LOW’ in their data transparency
- 3 players significantly pitching for transparency e.g. Faircent.com providing loan details by risk bucket, Avg ROI earned, quarterly report; i-Lend providing loan portfolio distribution and same is the case for indiamoneymart.com
- Charges: All are mostly variants of registration charges (one time with some having annual charges as well) and %age on the disbursed value being charged from both lenders & borrowers. Borrowers are nearly always charged at a higher rate (Min 1.5% to as high as 6%) depending on risk category/ interest slab while lenders are generally charged anywhere between 1%- 2%
- Interest/ APR: Here we see a significant range being advertised primarily to attract lenders. From 20% to 38% is a significant variation though for all player’s effective rate charged is proportionate to the risk category/ rating that the P2P player assigns to a loan based on internal credit appraisal algorithm
- Default/ Recovery: A few shares the default data publicly. i-lend displays defaulter list. Otherwise as of now the default rate seems to be low & under control. On recovery process, all speaks of follow up/ soft recovery at an additional charge
- Data Integrity: Players such as Faircent & lendbox.in shares customer’s bank’s data with 3rd party outside India aggregator (Yodlee) to get access to customer bank details. While they are transparent of this in their FAQ, the worry is that whether the customer do have a choice (considering that they are desperate enough- Med-High risk whom bank won’t entertain)? RBI is very specific that customer data should not reside outside country and hence this poses a potential contravention to that rule!
Areas where we feel that rules may or may not play a catalytic role:
- Transparency: REGULATION NEEDED. Minimum set of data/ metrics to be made available on quarterly basis to ensure there is no information arbitrage or asymmetry that skews the market. This will ensure genuine players prosper!
- Charges: REGULATION NOT NEEDED. Market forces should be able to handle this as experimentation & scaling will ensure that the players converge to a few workable variants
- Interest/ APR: REGULATION NEEDED. While prudent credit policy says that the rates should be at premium with higher risk of loans, but too high a rate can push a genuine needy borrower to despair & related social problems which then kills the very legitimacy of this mode of alternate finance. Unbridled rates can dilute the difference with money sharks and will be bad for the overall ecosystem branding. This is important as power is more with lenders in this ecosystem as borrowers will primarily of higher risk category needing event driven loans primarily! (See: ‘Loan Details by Risk bucket’ from Faircent.com and ‘Loan portfolio distribution’ from i-Lend.in)
- Default/ Recovery: REGULATION NEEDED
- Default data sharing: It may not be required to be shared publicly but there should be a central database of all P2P players which should maintain all defaulters & related data so that no one can game the system. In normal banking scenario, CIBIL plays that role but here most would not have a CIBIL and most P2P players neither seeks CIBIL nor provide input to CIBIL (except monexo.co/in which has credit bureau membership & does reporting to bureau as well). RBI may not be able to dictate this but the P2P players must evolve a common platform to implement this for their own benefit. Here Aadhar can play a very important role!
- Recovery: The rules needed as it is applicable for banking industry to ensure coercion does not create a new social challenge (remember what happened with Karnataka MFIs when they started to be little pushier during the recovery process)
- Data Integrity: REGULATION NEEDED. This is a grey area and here regulations should ensure that there is no undue exception granted. Same rule should apply for all financial data of a customer whether he is dealing with bank, insurance, NBFC or alternate finance players (P2P)
Unlike banks, P2P players are not lending and hence capital risk lies with the lender and not with P2P player. Hence CRAR & similar regulations will be misplaced for P2P ecosystem. Though RBI can mandate a minimum capital investment for a player to be registered to ensure that there is a ‘skin in the game’ especially many a startups winds very fast as well!
Overall our take is that regulation should be good for the sector to bring in some legitimacy (which will attract more lenders & borrowers), define some boundaries for play to ensure there is no undue risk that develops within the ecosystem and it is fair to everyone!
Obviously, we are against too intrusive rules that can ruin the innovation that forms the foundation stone for P2P lending. Example, there should not be any regulation on credit appraisal process (let everyone evolve & better it using machine learning); who can access this platform etc while sharing of default data can be on a blockchain across the P2P player & RBI.
To summarize, P2P lending is an established alternate financing method across the world (UK, USA, Australia, China, Japan etc.) and there is a proven need for the same as time & again we have seen banking system failure to address the same (not so attractive segment & cumbersome process for borrowers). But keeping it completely unregulated also has its risks as highlighted earlier.
RBI had already shared its viewpoint & asked public opinion on its whitepaper on regulating P2P sector. We are expecting the final opinion/ rules to be made public soon in next few days. We believe that RBI will take a pragmatic view and regulate just enough to contain the risk & spur innovation!
Featured image is actually one of the graph that is available at faircent.com publicly.
Pls. note in many of these P2P player websites, the information sometimes differ across different webpage