We ask the experts what impact P2P lending can have on the overall interest rate scenario in the country
Peer to peer (P2P) lending companies claim to provide loans at lower rates compared to banks. We ask the experts what impact this can have on the overall interest rate scenario in the country.
Harish H V, partner India Leadership Team, Grant Thornton India
In the current scenario, P2P lending will not have any impact on interest rates. P2P lending is very small in relation to the market. Available data in the public domain indicate a market size of about $5 million with a forecast of $5 billion by 2023. The overall market size for consumer unsecured lending is presently estimated at about $0.75 trillion and forecast to be nearly $2 trillion by 2023.
Also, the sector is nascent and the companies are still learning to price risk appropriately. In such situations, typically, risk premiums will be high and hence the rates are likely to be higher.
Presently, the sector is focussed on a different market from the formal lending market and is likely to impact non-formal lenders than formal lenders.
When this segment scales to significant levels, P2P lending will start competing with formal sectors. At this stage, platforms will have significant ability to reduce intermediation costs and benefit both lenders and borrowers. Also, automation and data analytics will improve their ability to price risk and finally it will become more pervasive and even customers who go to formal lenders will shift to P2P lending. I believe, that is when it will have a downward impact on interest rates. This is assuming that the traditional lenders will not go online and reduce their intermediation costs. The new scenario is likely to play out over the next 5 years.
Sayali Karanjkar, Cofounder and COO, Paysense
P2P platforms are deploying technology to reduce complexity and time costs in acquisition, origination and operations. They are driving efficiencies in the value chain by removing operational middlemen, and reducing spread between the lenders and borrowers. These savings are passed on to the customer, significantly lowering their interest costs.
This data-driven approach taken by credit platforms will make the market more open and efficient. Firstly, there is a large segment of borrowers that has limited or no access to organized capital. This segment is forced to borrow capital from local moneylenders or private investors, at exorbitant interest rates. A data science-based lending platform will be able to underwrite the credit profile of such customers and bring them into the mainstream lending market. This will help such borrowers reduce their cost of capital. Secondly, for the customers who are already borrowing from organized lending market, data science can further help refine their risk profile, leading to better risk-based pricing of their loans. Currently, these customers are being bucketed into two or three segments based on broad credit parameters. However, pricing of interest rate can be ‘personalized’ for each customer in the future. While this may not lead to reduction of interest rate for all customers, it will lead to market pricing the risk of each individual correctly.
Bhavin Patel, founder and CEO, LenDenClub
The interest rate theory works on supply of money in the system and the risk associated with an investment. When the supply goes up, it brings in downward pressure on the banks to bring interest rates down. As it is now clear that RBI is regulating the P2P segment, many more lenders will be willing to be a part of P2P lending. This will bring in liquidity to P2P platforms, resulting in a reduction in the interest rate offered to borrowers. P2P loans are executed by arranging an electronic meeting of lenders and borrowers on the platform. If lenders have excess liquidity and start pushing higher amounts, they may ask for lesser yield. The impact could be a reduction of at least 1.5% over the next year on P2P platforms themselves.
The other important aspect in determining interest rates is the risk associated with P2P loans. As these loans were not reported to any of the credit bureaus earlier, the chances of defaults were higher compared to similar retail loans. However, now, after the RBI regulations, the bureau reporting process will be started. This will make borrowers more concerned about timely payment of loans, bringing down the probability of default. This will reduce repayment risk, resulting in interest rates going down.
Both of the above factors will act in favour of borrowers. However, it will take some time before we see the real impact of interest rate reduction.
Raghavendra Pratap Singh, co-founder of i2ifunding.com
In the long run, the P2P lending industry is likely to compel banks to become more transparent as far as loan pricing is concerned. It’s been observed that banks hike rates swiftly during phases of monetary tightening but are reluctant to pass on the benefits of falling rates when monetary policy stance turns accommodative.
Factors affecting the loan pricing arithmetic are distinctly different in the case of P2P lending platforms. Getting an unsecured loan from a bank is a herculean task. Only about 3-4% Indians manage to avail unsecured loans from banks. Not more than 1% of India’s total population has any bargaining power on interest rates. The rest of the borrowers who manage to obtain unsecured loans are stuck to this route because of lack of any other alternative available. P2P lending platforms are likely to provide both transparency and availability.
P2P lending platforms offer other advantages such as, no prepayment penalty; they don’t have hidden costs; and have more flexible offerings in the unsecured credit space. As investors and borrowers gain confidence in P2P lending platforms, banks will find it difficult to retain them unless they become more efficient. Efficiencies on account of increasing competition will make interest rates more market-driven and will definitely put pressure on the ways banks and NBFCs (non-banking finance companies) are operating.