P2P lending platforms can put downward pressure on interest rates7 min read . Updated: 23 Oct 2017, 12:36 AM IST
Rajat Gandhi on his vision for the nascent P2P lending platforms industry in India, company's business model, and more
The Reserve Bank of India has given a special category non-banking financial company status to Peer-to-peer (P2P) lending platforms in India. The banking regulator has also come out with a framework for these companies, which also include limits on lending and borrowing for individuals and redressal mechanism to address participant’s concerns. Mint Money spoke to Rajat Gandhi, founder and chief executive officer of Faircent, a P2P marketplace which has been in operations since 2014, on his vision for the nascent industry in India. Excerpts:
Now that the RBI has given NBFC status to P2P platforms and has also come out with guidelines for the sector, what is the way ahead?
RBI started discussions on this last April and was talking about it since then, that P2P will be a special case NBFC; so that was not a surprise. Most of the guidelines also are in line with the industry expectations, just that there are a few grey areas where we would need some more clarifications. The way I see it, the RBI document is a framework, rather than hard guidelines. A lot of clarifications will be required for the operating guidelines. The framework looks promising and forward-looking.
In the short term, we all have to file our applications and get certifications in place. On the business side, it continues as usual; the regulator is not stopping us from that. The regulator will take us through the transition... I think it would take about a year from here. The framework and guidelines will help us a lot in terms of we will know what we have to do and what our boundaries are; what will be the business model; where do we invest money....
The P2P lending process was legitimate; the RBI framework has just validated it further. An important development is that the framework has created a redressal system— both for the borrower and the lender. While a lot of obligations will be on the platforms, there is also a lot of clarity now on our roles and responsibilities.
A lot of people had started to get into ‘principal protection’ and ‘assured returns’, which are misleading terms. Guaranteed and assured return is not possible here. In my opinion, even co-lending is misleading as it gives a false assurance to a lender. If I tell you I am investing somewhere, you also invest, you will get an assurance. But I have Rs10 crore to invest and my investments are spread across 1,000 borrowers. You have Rs2 lakh to invest, so your portfolio will not be the same as mine and you might end up with all defaulting borrowers. Some people were getting into these practices. All of this cannot be done now under the P2P banner. So P2P platforms will have to scale up businesses in a proper way in light of the framework and guidelines.
How do the RBI guidelines help a consumer, borrower or lender?
The guidelines basically tell the lender particularly what they are getting into, including the fact that the principal is not protected. We as companies should also keep telling them. Because the moment an investor hears interest rate, the immediate thought is assured returns.
Secondly, the guidelines have unlocked the supply side. Borrowing till now was restricted to banks and NBFCs, which have stringent guidelines. Whereas out here, this is an exchange model and the P2P platforms cannot lend from their own balance sheet, so the platform’s returns become interest rate agnostic. Their role is only to rate and price the borrowers, and as a platform, we do not directly benefit from this rating and pricing.
We have observed till now that there is always someone ready to lend to even a high-risk borrower. Banks and NBFCs call a borrower ‘high-risk’ for various reasons. For instance, they rate certain communities, areas, pin codes, professions as high-risk, which has nothing to do with the borrower’s financial health and profile. The P2P model now has the opportunity to really open up the credit market. There is a whole area that isn’t getting covered by banks and NBFC credit, which is now open. And when people start lending to each other, it will also bring the interest rate down. In markets where P2P lending has matured, it has put downward pressure on the overall interest rates.
If a P2P platform is interest rate agnostic, what is your business model and how does your business make money?
We charge the lender as well as the borrower. Basically, we charge 1% from the lender and 2-4% from the borrower, of the loan disbursed.
Do traditional NBFCs also lend through P2P platforms?
The smaller ones do. Though it is not very clear under the new guidelines if they can, but NBFCs as well as banks are highly regulated already and are allowed to lend money. I do not see why they should not be allowed to lend through P2P platforms.
People who do not get loans from banks or NBFCs are the general target customers for P2P platforms. So if an NBFC or a bank has already refused me a loan, why will they lend to me through your platform?
Let’s take an example of a Rs50,000-loan. What happens is that the bank or NBFC may not want to take a Rs50,000 exposure on you. But they can take a Rs5,000 exposure on you. And this being a crowd funding model, you end up getting your Rs50,000 from 10 different people. There are nearly 30,000 NBFCs registered with the RBI. You will only go to the top few when you look for a loan. When we aggregate these and you need a loan, there could be some small NBFC in some small Indian city which would be ready to lend to you. So a small NBFC, which does not have footprint beyond a small area, suddenly has this platform which allows it to lend across the country.
At the end of the day, credit decisioning is very subjective. With the same data points, somebody might refuse while someone else would agree to give you a loan, or may price the loan differently.
P2P platforms will now be a part of credit information bureaus. What will be its impact?
We use the credit bureau data to assess a borrower but we were unable to update data about a borrower. So the defaults of borrowers with us were not reported to the bureaus. Now that will start happening. This will benefit the whole ecosystem. This also puts some amount of check on the borrower as he cannot think that a loan from a P2P platform will not affect his credit score.
The guidelines also talk about P2P platforms giving services to lenders for recovery of loans. How does that work?
We have a recovery process. There are two-three parts of it. The first is collection and then later comes in recovery. Many defaults happen as the borrower forgets to repay the instalment in time or deposit a cheque in time. These people just need to be reminded.
Then there are the difficult ones who default for 2-3 months. You need to send a legal notice to them. We help our lenders with the whole process. But it is charged to the lender, or is recovered from the borrower. So if somebody says they are left on their own, they are not. It is just that they have to pay for the service.
We have a panel of lawyers who will take up the matter on behalf of the lenders. This is charged as this is a separate service.
When the profits in the form of returns on a loan belong to a lender, the risks and associated costs cannot belong to someone else. Irrespective of your returns, we are just charging a flat fee of 1%.
What is the size of P2P lending industry in India at present?
The size right now will be roughly around (RS) 50-60 crores on an annualised basis. Also there is no aggregated data as of now, so RBI will start collecting and publishing the data now. We expect to grow over 10 times in the next 12-18 months.
If I do not have any credit history, will a P2P platform still get me a loan?
Yes, you can. It is called zero and minus one, in credit bureau parlance. People who are new to credit and who have no credit history. India if full of such people. We do a lot of these loans.
You mentioned that some more clarity is required from the RBI. What are these areas?
The first is the definition of a participant. It says ‘person’ as a lender and a borrower. Does a ‘person’ mean as defined in Companies Act or does it mean an individual only. Then the RBI has capped lending by one lender at ₹ 10 lakh. We already have lenders who have lent over a crore and are now sitting on that.
Then it also says that the lending and borrowing caps are across all P2P platforms, I do not know how that will be put in to effect. It says self-declaration, which is not very clear. Then there are several operational issues as well.