In the hustle and bustle over what’s happening in the digital lending space, not too many of us are probably aware of the ground realities on the peer-to-peer (P2P) industry turf.
P2P is an online marketplace or a lending platform which collects money from individuals and lends to individuals as well as micro and small enterprises.
Before we discuss what’s happening in this space, let’s take a look at the profile of the industry.
In March 2016, the Reserve Bank of India (RBI) issued the first draft on P2P lending for consultation with the stakeholders. The licensing norms were finalised in December 2017. Apart from being “fit and proper” to be in the business of money, those who run the P2P platforms must have at least ~2 crore net-owned funds.
All loans generated on such platforms are collateral-free. Till recently, for a lender, the amount of a loan was capped at Rs10 lakh; in December 2019, it was raised to Rs50 lakh — at any point of time given to multiple borrowers across P2P platforms.
For the borrower, the limit of loans taken from multiple lenders is still Rs10 lakh. However, the exposure of a lender to a single borrower cannot exceed Rs50,000.
Typically, the interest rate charged to the borrowers is in the range of 18-20 per cent but it can be as low as 11-12 per cent, for the deserving customers with high credit ratings.
The RBI has issued around 25 licences so far but not all of them have gone live. At least one of them (Dipamkara Web Ventures Pvt Ltd) has exited the space and another (Bigwin Infotech Pvt Ltd) has stopped doing business.
Going by the publicly disclosed data by the companies, the top four P2P companies in terms of volume of business are Fairassets Technologies India Pvt Ltd, Innofin Solutions Pvt Ltd, NDX P2P Pvt Ltd and Transactree Technologies Pvt Ltd.
In FY22, around Rs3,000 crore was lent; these four companies had the lion’s share of the pie.
Like any other entities in the financial sector, P2P lenders need to follow the normal disclosure norms, report every quarter and are subject to RBI audits.
How do the platforms make money? They earn fees from both the lenders and the borrowers.
There are dos and don’ts for them. For instance, they cannot raise deposits; neither can they offer any credit enhancement/guarantee facility. They cannot use the funds received from lenders and repayment from borrowers for lending directly to any entity and cross-sale any product barring insurance cover for loans given. Finally, they cannot offer any kind of guaranteed returns to the lenders.
If we go through the websites of some of the companies and the advertisements, we will find how the norms are violated.
For instance, one company is offering “up to” XX per cent return to the prospective lenders. The interest rate offered is the lowest when there’s no lock-in (one can withdraw money anytime one wants!). Higher rate is offered for three-month lock-in; and the highest, for 24-month lock-in funds.
The term “up to” meets the criterion of no guaranteed return but how can a lender on this platform withdraw money any time and earn interest even for a few days when the loan is given for a year or two and repayment is done in equated monthly instalments?
Clearly, this is not peer-to-peer lending. Some of the P2P platforms are creating a pool of funds to lend. There is no one-on-one lender-borrower relationship, something sacrosanct in this business model. Some of the companies may also be leveraging their own balance sheets to ensure anytime withdrawal of money by the lenders.
Aren’t they sowing the seeds of asset-liability mismatches by doing this? One P2P lender manages its asset-liability by keeping around 10 per cent money undisbursed. As the loans given are of shorter duration, at any given point of time a certain percentage of loan portfolio rolls back, pushing the pile of cash helping it meet premature redemptions.
Clearly, this entity is “managing” funds instead of offering a meeting platform to the borrowers and the lenders.
Anytime withdrawal essentially makes such funds what are known as “liquid funds” in the mutual funds industry. The liquid funds are invested in money market instruments such as treasury bills, commercial papers and certificate of deposits, among others, with a residual maturity up to 91 days and there is no lock-in period for the investors. Settlements are done within two days of trade (T+2). If one notifies willingness to withdraw money on Monday, by Wednesday one gets it back.
But on the P2P platform one is lending to another. If the loan is of one-year maturity, how can the lender get out any time she wishes?
A few platforms are also luring lenders with different plans of different maturities, offering “up to” XXX per cent — a proxy for fixed deposits of banks.
Yet another innovative way of doing the P2P business is “renting” out the licence to unregulated entities. A few enterprises, including credit card payments apps and merchant payment aggregators, have been indulging in such practices.
How is this done? A credit card payment app is aware of the spending habits and repayment habits of millions of customers. With the explicit permission of the users, it has access to their credit scores and even emails. Armed with these, it knows who is flush with money and who needs short-term loans. All it needs to do is transport both sets of users to a P2P platform where the loans will be booked.
Ditto for the merchant payment aggregators. They are familiar with the financial health of millions of merchants — who have money and who need it. All they are doing is using a licensed P2P platform for giving very short-term — one to five days — loans. A few “clubs” have sprung up, offering a certain per cent of interest. The clubs are named accordingly.
Zopa of the UK, the first P2P lending company globally, started its business in 2005, directly matching people looking for a loan with investors looking for a handsome return. Within months of Zopa’s entry, the US saw the birth of its first P2P lender — Prosper.
New Zealand and China joined in the last decade to make it a global phenomenon. At one point, China had more than 5,000 P2P lenders in operation and the annual transaction volume was at least $450 billion. By 2020, it had been completely wiped out from China’s financial landscape, following a severe clampdown by central and local regulators to stop the malpractices.
One hopes that the RBI’s recently released regulatory framework for digital lending will ensure that the P2P industry in India doesn’t face such a fate at its nascent stage. When high inflation is eroding the value of money of the savers, this industry can grow manifold benefiting both the savers and credit-starved millions who cannot borrow from banks and non-banks.