Peer-to-peer (P2P) lending was among the first forms of fintech that Indian consumers were exposed to. In a country where access to formal credit has always been a problem, and loans from friends and family are common, P2P lending seemed like a no-brainer. And it didn’t disappoint.
Early entrants into the market like Faircent saw a strong response to their P2P lending platforms, which, in turn, has attracted newer entrants like Lendbox which launched P2P lending operations in November 2015.
At Lendbox, business has been growing at an average of 20 percent month-on-month over the past year, Bhuvan Rustagi, one of the three co-founders of Lendbox told BloombergQuint in a phone conversation. The platform currently has outstanding loans of Rs 20 crore, Rustagi said. BloombergQuint could not independently verify these claims since Lendbox is a private company.
According to Rustagi, business is coming from a range of sources. From those looking to repay debt to banks and financial institutions, to those who need funds for a medical emergency and even those who want to borrow for a holiday. On its website, Lendbox lists nine different purposes for which borrowers can access the website and seek out the cheapest possible loan available from anyone who may have extra funds.
You can log in to Lendbox and put in an application for loans ranging from Rs 25,000 to Rs 5 lakh with tenures varying from three months to three years. The average ticket size of loans is Rs 3 lakh, according to the company. So far, the company has gathered about 45,000 users.
Lending rates start at a reasonable 12-16 percent but can go as high 28 percent based on the purpose of the borrowing and the risk profile of a borrower.
The banks cater to the top 5 percent of the population but we are trying to reach the next 25 percent who also need credit but may be not in large quantities. They also don’t usually have collateral to provide so they seek unsecured loans.Bhuvan Rustagi, Co-founder, Lendbox
While there is no reliable estimate of the size of the P2P lending market in India, Rustagi admits that there is enough competition.
Lendbox is one of about six big P2P lending platforms in India, each operating with a largely similar basic model. Lendbox differentiates itself by claiming to have a robust system of credit assessment which tries to keep out those borrowers who may not be willing to repay on time.
Lendbox collects more than 300 data points on a borrower when they sign up on the website. These data points are a mix of personal, financial, social and psychometric indicators. “The value proposition with Lendbox is basically that we have a very strong credit and risk assessment model that helps our lenders limit their risks,” said Rustagi.
According to Rustagi, the delinquency rate at Lendbox is currently less than 1 percent.
Lendbox also requires at least three people to fund any loan of more than Rs 75,000. This, Rustagi said, helps spread the risk.
It’s so that there are three people who are investing and they have lower risk by diversifying their investment. Borrowers also have more pressure to repay. If you don’t repay, you are expecting court summons from three to five different courts in the country.Bhuvan Rustagi, Co-founder, Lendbox
While delinquencies at a aggregate level have remained below 1 percent, Lendbox has had to intervene to try and ensure collections in some cases. They do this either through collection agencies or by intervening informally between a borrower and a lender.
That is where the need for regulation arises.
So far the P2P lending segment is unregulated. In April 2016, the Reserve Bank of India (RBI) issued a and suggested a number of checks and balances. Among them was a minimum capital requirement of Rs 2 crore for companies operating as P2P lenders and a prescription for the leverage ratio that these companies should adhere to. It also said that P2P lenders should operate only as intermediaries and ensure that they don’t take on any bank-like functions such as accepting deposits.
No cap on rates or lending amounts was prescribed. The regulator, however, said that prudential limits may be considered.
If the sector is left unregulated altogether, there is the risk of unhealthy practices being adopted by one or more players, which may have deleterious consequences.RBI Consultation Paper on Peer to Peer Lending, April 2016
While it has now been a year since the consultation paper was issued, final guidelines are still to be released.
Rustagi said there will be greater clarity on the business once the regulations are finalised. “The guidelines will tell us what to do and what not to do in clear terms. We don’t know what we can or cannot do and after regulations, we will have a level playing field to work with,” he said.
The business model, too, will evolve as the rules become clear.
At present, Lendbox earns revenue by charging a commission from the borrowers on their loans based on the total amount and the interest rate. Lendbox usually takes about 3-4 percent of the loan amount as commission.
Starting next month, the company will also levy a one time registration fee for both lenders and borrowers on the platform. This fee is likely to be in the range of Rs 250 to Rs 500, according to Rustagi.
Some good businesses could emerge in this segment if appropriately regulated, said Vivek Belgavi, partner and fintech leader at consulting firm PwC. The product is exciting but it needs to match up to the expectation of being transparent and fair, said Belgavi.
There are a variety of experiments in fintech space. Whether one of the legs will become a business or a bank, that only time will tell. But regulation is important to make sure there is enough coverage for the risks involved. The loans are short term and the pricing could turn predatory which needs to be governed.Vivek Belgavi, Partner and Fintech Leader, PwC
This report is part of a series profiling fintech firms changing the way financial services operates in the India. The series will play out every weekend on Bloombergquint.com