P2P lending is a relatively new kid on the block of alternative lending. Though the industry is still in a nascent stage, the p2p platforms have managed to cause their fair share of disruptions. Are these tech savvy trendsetters really a threat to the traditional lending tycoons such as NBFCs, and MFIs? Well, let’s find out!
P2P lending is a type of new age finance offered by the people, for the people. The P2P platforms act as financial match makers between the Lenders and Borrowers by providing them an online marketplace to connect with each other and negotiate a fair deal without any financial intermediaries.
Traditional banks don’t often take a human-centric approach. The tedious and time-consuming process of applying for a loan from bank tends to drain all energy out of the borrowers. Also, the meager interest rates offered for depositors leaves much to be desired. The millennials who are done waiting for the banks to understand them have started looking for alternative ways to lend and borrow.
The way in which P2P lending sites offer high returns for lenders while providing loans at competitive interest rate for borrowers has managed to keep the desperate consumers hooked to it.
Gone are the days where you need a near perfect CIBIL score to get your loans approved. P2P platforms ease up the nightmare of a bad credit score with their holistic approach to risk assessment.
The cutting edge machine learning algorithms used on P2P Lending sites take an array of options like the net salary of a borrower, educational qualification, locality of stay, individual expenditure trends such as online spending behavior, etc. into consideration when it determines the creditworthiness of a person.
The aspect which makes a borrower eligible for a loan with a reasonable interest rate despite their bad credit history is the main reason why a steady flood of borrowers head towards P2P platforms.
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Reasons Why Borrowers Prefer P2P Lending Platforms
The poor interest rates offered on deposits, skyrocketing real estate price, fluctuating gold value, unstable nature of stocks and the fact that P2P provides 50% bigger returns than the average deposits is the reason why a massive influx of investors (majorly Millennials) towards P2P lending.
Higher yields – The Return on Investment (ROI) entirely depends on the amount of risk an investor is willing to indulge in. The higher the risk, the better the interest.
Empowerment – The transparent nature of P2P platforms coupled with the solid backing of risk assessment gives investors strong knowledge to control the where and how to invest.
Diversification – Financial advisers often insist that diversification is the key to any good investment. Similarly, P2P sites offer investors an opportunity to diversify their portfolio by investing in a broad range of borrowers spread across different risk categories.
RBI Guidelines – Boon or Bane?
The approach of regulators across the world is different when it comes to P2P lending. While a few countries treat them as banks and need a banking license to operate, in few countries, there are little to no regulations.
Countries like Israel which previously prohibited online lending platforms have come up with a legislation exempting the licensing requirements with a recommendation to regulate them in future.
RBI has decided to regulate the P2P space due to the impact it could have on the traditional banking channels/NBFC sector. RBI has proposed to bring P2P lending platforms across India under their regulation by defining them as NBFCs. The norms have been finalized, and the final guidelines are expected to be released in a few weeks.
Cons
Though both NBFCs and P2Ps take a vital role in shaping the financial market for the welfare of consumers, they are starkly different from each other.
While NBFCs concentrate predominantly on the rural, and semi urban sectors focusing more on financial inclusion by extending out credit to the unbanked population, the P2P industry takes a pro-urban route, converging towards funding the tech-savvy individuals and business which don’t qualify for traditional loans.
Though NBFCs have a steady flow of offline customers, their lack of technology adoption made their growth rather dormant in this digital age. Though few NBFCs remain hesitant to embrace technology, a significant number of NBFCs have taken it up as a challenge and come out with flying colors.
As banks are rather wary of lending to first-time customers with little to no credit history due to the rise of bad debt issues and so NBFCs tend to focus more on this gray area. Their expertise in this arena when back by innovative technological measures would give the dominating P2P sites a fierce competition.
While P2P platforms use robust algorithms to determine the creditworthiness of a customer, NBFCs use a variety of similar innovative ways like psychometric tests, mobile apps which evaluate a borrower’s social media profiles, etc. to ascertain a borrower’s behavior as a part of risk assessment.
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NBFCs have the edge over P2P sites when it comes to procuring customers since they rely on the most powerful marketing strategy, the “word-of-mouth” marketing. Most NBFCs either depend on traditional financial organisations such as public/private sector banks or attempt to raise funds through bond market forms, not many NBFCs opt for public funding.
On the other hand, P2P sites depend completely on individual investors. They already have a hard time educating the masses about this new asset class and helping them understand the intricacies involved. The unregulated nature of P2P landscape makes investors look at it through a thin veil of skepticism tinted perception. Spreading awareness amidst this suspicion to attract borrowers and lenders is the most challenging factor faced by the P2P sites.
The revenue model of NBFCs and P2P platforms are almost similar. NBFCs acquire funds from various source and lend those funds to individuals or business at a higher rate. Here, the revenue generated is just the lending rate (aka portfolio yield).
Similarly, P2P platforms generate revenue charging borrowers a flat rate or a negligible percentage of the loan value as the transaction fee or commission charge. Some platforms also charge investors on the returns they generate.
Likewise, just because the P2P platforms garners attracts a large volume the techno-dexterous population doesn’t mean that NBFCs have to look at them as threats. Technology is the primary driving force in today’s world, so as to cement their presence as an alternative to traditional banking, NBFCs have to embrace the technology led innovation which is disrupting the Financial sector.
Instead of looking at P2P sites as competitors, NBFCs could make a tie-up with them to create a strong business model which leverages technology to come up with an innovative customer-centric product that is tailor made to fit their specific needs.
“NBFCs are seasoned veterans when it comes down to lending, fusing their expertise with the tech savviness of the P2P sites could cause the financial landscape to flourish and grow exponentially.”
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Well said Sir Its really a great information about P2P Lending , My main doubt is how its going to effect the NBFC’s and the way you given answer to it is really fantastic ,Thank u for giving valuable information and lets see How RBI is going look these P2P networks in coming future .
Thanks®ards ,
Krishna Sai Jayanthi
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After smartphone penetration, people are not watching their SMS at all. They use SMS only for OTP related transactions. That’s it.
But What can a Lender see in your SMS after you consent to them?
Lender can see income, expenses, and any other Fixed Obligation like (EMIs/Credit Card).
1) Income – Parameters like Average Salary Credited, Stable Monthly inflows like Rent
2) Expenses – Average monthly debit card transactions, UPI Transactions, Monthly ATM Withdrawal Amount etc
3) Fixed Obligations – Loan payments have been made for the past few months, Credit card transactions.
It also tells the Lender the adverse incidents like
1) Missed Loan payments
2) Cheque bounces
3) Missed Bill Payments like EB, LPG gas bills.
4) POS transaction declines due to insufficient funds.
A massive chunk of data is available in our SMS (more than 700 data points), which helps Lender to make a credit decision.
An interesting insight on vehicle loans for lenders.
A trend we are seeing today – the first-hand vehicle ownership is decreasing with time. Why? People are upgrading their vehicles in every few years because of technological advances. And, this can be seen more with the millennial generation.
So, what should a lender do in terms of financing?
– Estimating the residual value of the vehicle at the start of the financing period.
– Charging a borrower only for the residual value (which is the difference between the value after a few years and the current value)
Example: A bike currently is INR 1 lakh. You want to buy the vehicle for 2 years. A lender will estimate the residual value of that bike today and what it would be after 2 years. If the estimated residual value = INR 45,000, the lender will charge you only that (say, INR 55,000 with interest for this instance) during your tenure.
At the end of 2-year period, you have 3 choices:
1. Return the bike and upgrade to a new one without going through the struggle of selling it.
2. Pay the lump sum remaining amount to own the vehicle outright.
3. Extend the financing and own it by keep paying the EMIs for the remaining amount of the vehicle for the next 12 or 18 months.
Benefits for the borrowers?
– Flexibility to use a vehicle and upgrade to a new one.
– Affordability to not pay for the complete value of the vehicle with the intention to use for a lesser amount of time.
– Convenience in owning the vehicle.
Say goodbye to the old lending option and embrace the new way of financing for vehicle by lenders!
How many of us know this?
1) Tiktok does Lending ( is it an entertainment company or social media company or a fintech company?
2) Youtube China does Lending
3) Top 100 internet companies in China(no matter what business they are in) do Lending
The team which was heading Lending in Tiktok was the Advertisement team. If we do Ads, we do X no of revenue. But if we do lending, we’ll get X+30% more revenue. This is on the same Ad spot.
Ad team has transformed into a lending team, and in today’s world, it’s possible because the subject matter expertise can be put in as an API and given to you.
Embedded Lending as a service is becoming popular in India too, and I am happy to be part of this ecosystem.
The answer is No. Only the top 10 crore people have access to many credit products in India. Almost all Banks focus on this market.
Once you go beyond that, the credit access rate has dropped significantly due to multiple factors.
1) Customers who are having low income(30-40K per month)
2) Not earning from an employer who belongs to Category A or B
3) Not from Tier 1 or 2 cities
NBFCs and Fintechs focus on the above segment, pushing another 10 crores of people.
But in India, 70 crores more people are formally or informally employed, which still needs to be tapped.
Rajesh Shetty
August 7, 2017Hi Shivasankari,
Good research & well written blog. Thanks for sharing more information on how P2P lending threat to NBFCS. This blog was really more informative & includes more details of P2P.