Bangalore: Himanshu S. is the founder and chief executive of user interface design firm Cheese Corporate Care, an enthusiastic squash player and an avid reader—all fine for your typical overachieving 29-year-old.
He is also a a social investor looking for opportunities to help the poor in their small business ventures. To date, he has extended loans to at least 50 such people.
He lends up to Rs5,000 to each individual. He doesn’t make much money from the loans on which he earns a 2% flat rate of interest. Thus far, no defaults have come his way. His social endeavours started in October 2008 when he came across a website featuring the profiles of those requiring small loans. His first borrower was a woman who made incense sticks. She was looking for a loan of Rs5,000 to expand her business.
Fresh chance: Kaushalya Devi from Uttar Pradesh was helped by Rang De and now runs a provision store.
Himanshu is appreciative of the website that directed his attention to people who needed small loans. “There is no other organized platform to invest in the poor….to help them change their life.”
The website that put Himanshu across to the incense-stick maker is a start-up called RangDe.org. It’s a peer-to-peer (P2P) lending platform, which facilitates person-to-person lending by putting up profiles of the needy. There is no ceiling on the loan amount, which has to be paid back within 12 months. Loans start at Rs100.
Rang De is one of several P2P micro-lending start-ups that have emerged in the past 18 months. Others are DhanaX Information Services Pvt. Ltd, Lendesk Financial Services Marketplace Pvt. Ltd and Nanofin Enterprises Pvt. Ltd. All are facilitators. DhanaX, which has facilitated the disbursal of Rs1 crore since it started in May 2008, says its default rate is zero.
The firms leverage the microfinance model, targeting the poorest who do not have access to even microfinance companies that charge between 18% and 27% a year on loans to cover their higher transaction costs.
P2P lending firms charge 8-15%. Some of them have non-governmental organizations (NGOs) as field partners that vet the credentials of the borrowers before their profiles are put up on the site or the P2P company lends them money. “We think we can do a lot more by involving the country’s middle class,” says Rang De’s chief executive Ramakrishna, who goes by only one name. Rang De, an NGO, facilitates loans worth Rs3,000-10,000 to individual borrowers at an interest rate of 8.5%. Since it started in January 2008, it has facilitated the disbursal of loans of Rs79.9 lakh to 1,400 entrepreneurs. It has 589 social lenders, a term it uses to describe people such as Himanshu. The 8.5% is split between various partners: 5% goes to field partners, 2% to social investors, 1% to Rang De and 0.5% to a contingency fund. “These investments are not for maximizing returns. The idea is to see how life changes for a few with your support,” says Ramakrishna.
Since these firms do not collect the money from lenders but only offer a platform for lenders and borrowers to connect, they don’t fall under Reserve Bank of India (RBI) regulations. However, the companies say they need protection and support from the government for accelerated growth. “We need a regulatory method so that we can have pool funds, so that loans can be disbursed as and when required,” says Siva Cotipalli, co-founder, DhanaX.
RBI, however, says its regulations are only for banks and non-banking financial companies. “Peer-to-peer lending does not fall under our purview,” says an RBI spokesperson. Currently, RBI has a regulation in place applicable to the unorganized sector, including moneylenders and others, but this merely prohibits lending at exorbitant rates.
Meanwhile, P2P lending has helped people such as Kaushalya Devi from Uttar Pradesh’s Bahraich district. A mother of four, Devi was looking for ways to supplement her family’s income. “An NGO worker approached me and said he would help me in getting the loan. He put my details (profile) on the computer and I got Rs5,000 in about two weeks,” says Kaushalya, who was helped by Rang De and now runs a provision store.
Experts say while P2P lending will always find takers, scalability will remain a huge issue. And these firms may not generate interest among regular venture investors as returns are low, since it is more of soft loans rather than investments with an eye on profits, and it is a long-term play. “There is no precedent of success of such firms in the country. Peer-to-peer lending hasn’t been a success story anywhere,” says Rajesh Srivathsa, managing partner, Ojas Venture Partners.
Microfinance companies don’t see P2P lending as competition, but expect these firms to come under RBI’s scanner in the long run. “If someone is lending Rs1 crore, it’s no more just individual lending. There will be questions as to how they are running it (the business),” says Chandra Shekhar Ghosh, managing director, Bandhan, a Kolkata-based microfinance company.