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P2P: The New Digital Lending Platform
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In today's digital world, the old icons are fading away. The classified matrimonial ads and travel agents as we know have been eclipsed by digital platforms. Similar disintermediation platforms have sprouted in the financial space as well in the form of P2P.
Simply stated, P2P is a digital platform connecting unrelated investors and the borrowers in the place of traditional intermediaries like banks. The banks accept deposits from its customers and on lend the same to various sectors, the relative credit risks being borne by the banks themselves. P2P is a similar conduit except that the investors or the lenders directly assume the credit exposure. They have the option of choosing the borrowers themselves or depend on the P2P platform for credit evaluation. But what is the USP of such platforms? The banks are high cost islands and spend a lot on employees, IT systems, infrastructure etc. and are subject to regulatory prescriptions like CRR. Also credit decisions get delayed on account of due diligence protocol.
On the other hand, P2P platforms are not burdened with legacy and other costs incurred by the banks. After all, the platforms serve only as an intermediary and quick decisions are taken by individual investors.
Operationally, customers viz. individuals / businesses in need of finance are sourced through field agents after some initial filtering at the local level. The details of such customers are then put out on the website and the investor can select the individual borrower suited to his lending philosophy.
Alternatively, the platforms themselves can also do a quick credit evaluation. These outfits are staffed by tech-savvy youngsters who employ modern credit scoring models, accessing customer data through credit bureaus, bank / credit card statements, employment history etc., digitally. Therefore, data sourcing / storage and data analytics are critical tools in the whole process. Once the credit decisions are taken, the loans are disbursed through field agents who also track project status and act as collection agents for loan repayments.
It is therefore a win-win for the borrowers and investors alike. While the borrower gets timely credit on reasonable terms, the investor has the benefit of higher interest rate as compared to say, the deposit rate offered by the banks, with the benefit of loan diversification amongst a number of borrowers. It is important to note that all these loans are unsecured. While the credit risks in bank lending are borne by the banks, in P2P, the investor assumes the credit risk and there is no fall back mechanism such as credit insurance or guarantee.
The P2P platforms which spend monies on customer sourcing, credit scoring and credit administration are compensated by a one-time fee to cover sourcing / appraisal costs as well as periodical fee for loan administration. Illustratively, in India, an investor can get a return of 8 per cent, the field agent 4 per cent and the platform 4 per cent on the loan amount. The total interest cost of 16 per cent is still cheaper for the customer than say borrowing through credit cards. The concept opens up a new window for customers through what is known as "crowd funding". But the key to success is a reliable field network, good customer acquisition, bandwidth for managing operations, tested credit models and of course correct pricing.
A minor variant of the theme is the social P2P, usually run by a non-profit organization viz. NGO for small ticket loans ranging between say Rs 5,000 to Rs 25,000 for entrepreneurs in semi urban and rural areas.
Petty business apart, loans can also be taken for purposes like education, sanitation, drinking water etc., which have no business angle. The rate of interest would be very low and the platforms too charge only a nominal fee to cover their administrative cost. This is financial inclusion in the true sense.
Small Business Finance
If P2P is a good intermediation vehicle, can the concept be extended to cover small business finance / small scale industry also? These businesses perennially complain of non-availability of funding through institutional / banking channels. For one thing, banks are little wary of defaults in this sphere. Besides, due diligence process can be fairly lengthy and time consuming. Therefore, P2P can emerge as a true savior for such credit starved businesses and can be a successful platform if good credit standards are maintained consistently. After all, the credit risks would be higher and the investors would naturally look to the platform for high standards of credit scrutiny.
However, as compared to availability of digital data in the consumer segment, it is rather limited in the business sphere. One has to use financial tools / information like balance sheet, tax statements, statements filed with Registrar of Companies etc. But then, the number of loans as compared to consumer financing would be far less and one could perhaps go the extra mile for the information.
One area where P2P can intermediate efficiently is factoring of receivables through an electronic platform. If invoices of reputed companies are digitized, financing at competitive rates can be arranged through "crowd funding" quickly which will be a boon to small business establishments.
The high networth individuals viz. HNIs will find it a good way of deploying The concept is relatively new and is making waves in the International markets. Even some large banks and hedge funds are investing a small portion on such lending and there are moves for even bundling the credit portfolio of the investors and securitizing the same. In India too, one can visualize a rapid growth of such platforms, given the useful interventions for both lenders and loanees alike. Particularly, the social P2P platforms will prove very popular among the millennium generation who will find a sense of fulfillment for worthy causes.
Finally, can they be a major challenge to banking behemoths? Not likely. The banks are giant institutions with phenomenal balance sheets. Besides they are re-inventing themselves in the digital space in a big way and speeding up decision making. P2P platforms can at best nibble at the margins though they can grow rapidly given that the market for credit is indeed very very large. As of now, the activity, being nascent has escaped regulatory scrutiny though one can expect the Mint Street taking some interest in future. Before that the platforms themselves can perhaps form a self regulatory body and lay down basic ethics to fend off any criticism.
(The author, P N Venkatachalam, is former MD, SBI)