Why do we Need P2P Lending in India?

This is a guest post by Sunil Kumar, CEO of Loanmeet

Tragically, more than 78% of Indian population cannot get a personal loan from a bank or NBFC. Why? The reason is quite simple – most banks grant personal loans to salaried employees with annual gross salary above Rs. 3 Lakhs. Some banks give personal loans only to individuals earning Rs. 6 Lakhs per annum. If an individual is NOT working at one of the big MNCs or listed companies, then it would be a difficult for him to get a loan, or worse yet, his/her interest rate would be substantially higher. The P2P lending however, works differently; it comparatively uses multiple parameters to determine credit-worthiness of borrowers. The P2P credit models traverses beyond the salary of individuals; and fortunately, it does not decline the loan application even if the borrower’s salary is considerably low.

P2P lending, peer-to-peer lending amongst individuals, is not a new concept. It has been practiced for centuries. Even today, most individuals ask money for their short-term needs from friends and relatives. In old days, most individuals did not make EMI payments when they got loans from their friends and relatives; most loans were interest free, and as a victim of the evil perception of temporary profitability and eventual losses, there was a balloon payment at the end of the loan period. The private money lenders charge high interest rates, and seize land or jewelry for collateral. The online P2P lending model formalized the entire process of taking loans from friends, relatives, and unknown individuals, and made it simpler for us to get quick cash or earn great returns. The borrower puts an online loan application, and the platform either rejects or accepts the same. If the loan application is approved, then the lenders fund the loan amount. The loan payment is collected in the form of EMI payments, and sent to lenders. Continue reading

P2P Lending in India: A Concept Ahead of its Time

This is a guest post by an author working in the financial sector in India.

Consumer Peer to Peer or P2P lending (where consumers lend and borrow from each other with the help of an intermediary) has become an important part of the financial services sector in many countries globally. Companies like Lending Club and Prosper in the US, that only started a few years ago are now worth billions of dollars. Many success stories in the west have been replicated in India, making it a belief amongst many that P2P Lending is no different. However, as proven multiple times before, a credit business isn’t the easiest to clone and depends on multiple factors including the regulatory environment, end-user mindset towards credit and intermediaries such as credit bureaus, verification, collection and recovery agencies.

  1. P2P Lending is not regulated in India

indiaThe Indian Banking Regulator, The Reserve Bank of India (RBI) has not regulated peer to peer lending in India. This essentially means that privileges enjoyed by similar platforms globally, namely, access and reporting back to credit bureaus (like CIBIL in India); are not available to a P2P platform in India. These have important repercussions on the performance of loans originated through these platforms and can lead to suboptimal results. For e.g. if lenders are not able to see credit reports, then they will be in an inferior position compared to banks and other financial institutions to make credit assessments. Similarly, without the loan performance being reported back to the bureau, some borrowers may not feel the pressure to re-pay their lenders. Lastly, borrowers looking to build and improve their credit rating do not benefit, as their loan performance is not reported to the credit bureaus (CIBIL).

  1. Little spread between risk-free rates and borrowing rates from banks and other regulated financial institutions (NBFC’s) provides no real benefit to borrowers

A huge difference between the west and India is the difference between the risk-free rate and the borrowing rate. In the US and UK the difference between the two is as much as 12-15 percentage points. In India, the risk free rate is at over 8% and banks lend money starting at 12%. With lenders looking to make returns between 15-16%, the rate for the borrowers gets as high as 20%+ when the platform fee is also taken into account. This makes it unsuitable for lower risk borrowers who can find cheaper loans from banks and non-banking financial companies (NBFC’s). Continue reading

Milaap Raises 1.1M US$

P2P microfinance service Milaap (see earlier coverage on P2P-Banking.com) raised 1.1 million US$ from Jungle Ventures (Singapore), Toivo Annus,Lionrock Capital, Jayesh Parekh and Unitus Seed Fund. The current round of funds will be utilized to expand engineering and marketing investments for enhancing the online product experience, and to invest in scaling up marketing and outreach efforts.

Milaap says that so far 100% of the microfinance loans originated have been paid back.

Kiva Enters India

Today Kiva expanded its service to borrowers in India. India is the second most populous country and the largest democracy in Asia. India is an emerging economy (part of the aspiring fast growing so-called BRICS countries), but growth has slowed over the past years.

India is still country with large differences. Kiva states that ‘With more than 32% of India’s population falling below the international poverty line and 68% living on less than US$2 a day, the country is in dire need of responsible, affordable sources of capital. But India has a complex history with microfinance, leaving many financial institutions unable or unwilling to serve poor and socially-excluded borrowers. Recognizing this need and opportunity, Kiva wanted to give the global lending community a simple, ethical channel to support India’s most geographically-isolated, underserved and vulnerable groups. These groups include widows, the disabled, leprosy-affected families and many more who have had virtually no chance at making a sustainable living for themselves before now.

To start its p2p microfinance for India Kiva has partnered with 3 MFIs: People’s Forum, Mahashakti Foundation, and WSDS.

To comply with regulation in India loans will have a minimum term of 3 years and there will be no repayments to the lender during the 3 years. More details on Kiva’s country page.

P2P Lending in India – Interview with i-lend

VVSSB Shankar, founder & director of i-lend, answers the questions of P2P-Banking.com.

What is i-lend about?

i-lend is an Internet based P2P lending platform in India which went live two months ago. Presently this service is available in Hyderabad, Andhra Pradesh. The portal connects the two sets of customers i.e. borrowers and investors who register online, undergo a verification process, list their requirements on the portal and agree for a mutually beneficial financial transaction.

Tell us about how your target customers traditionally seek loans?

Typically most of our borrowers have recourse to either personal loans from banks or resort to credit cards usage. These personal loans are available only to a selected segment working in some top 500 companies. Most people who are not a part of the above mentioned segment have to resort to private borrowings on which interest rates are very high more like 21 to 28%.  Moreover a vast majority of urban India who otherwise are gainfully employed are denied credit for various reasons. Personal loans are also very expensive in India attracting rates between 16% – 24% by banks.

Is there a reliable credit scoring model in India?

CIBIL – a credit rating institution was established a few years ago and today it is the de facto body which maintains credit scores. However the credit rating eco system is evolving.

What other challenges did i-lend face to introduce p2p lending in India?

Before establishing a P2P model in India, it was essential that we understand the complex regulatory environment. We had ensure that we were following various laws governing the banking sector, financial institutions and other state laws with respect the money transaction. With this information, we then worked on a viable business model for P2P lending in India.

We also had to modify the model such that both borrowers and investors found it attractive. For instance, i-lend does 100% physical verification of all details provided by the borrowers at both his residence and workplace reference. We also collect Post-dated cheques from borrowers for the loan tenure.

What are the three main advantages for lenders?

– Higher returns (at least 3 times more) on idle money compared to Saving Account – The return on savings account in India is 4% while i-lend offers a minimum returns of 12% on loans given to borrowers.

– Monthly returns on money invested through borrower EMI payment – While other investment options have a lock-in period, p2p loans will give investors monthly returns i.e. liquid cash

– A new investment option – where investors can decide whom they wish to invest in, their desired interest rate and spread their risk by investing in multiple borrowers – Min. investment amount is Rs.5,000.

What are the three main advantages for borrowers?

– Lower interest rates starting at 12%. Typical bank rates are anywhere between 17-19% and offered to select few

– No prepayment charges – Banks charge anywhere between 2-4% of the principal outstanding as pre-payment charges

– Flexible loan amounts – Rs.25,000 – Rs.300,000: Banks typically offer loans from Rs.100,00 only.

What interest rates do you expect to see on the marketplace?

We expect the interest rate to be anywhere between 14-16%. Continue reading

My First Unitedprosperity Loan Guarantee

I just guaranteed $25 of a loan to Sakho Devi and group, Ritudih, India via Unitedprosperity.org. United Prosperity has launched on May 28th. See my earlier United Prosperity review including an interview with CEO Bhalchander Vishwanath for more information on the concept.

Signing up and selecting the loan went smoothly. For the requested loan of 1,052 US$ a guarantee of 579 US$ needs to be raised.

Sakho Devi has a grocery shop of her own, with which she earns her living. She has applied for a microloan to expand her small grocery shop, so that she can meet the demand from customers.

The listing also states some data about the partner MFI – Ajiwika Society – it’s interest rate, delinquency rate, default rate and target clients.

Unitedprosperity.org – guarantee a microloan to small entrepreneur in India

Californian non-profit United Prosperity developed a new twist to social lending – it is a peer to peer guarantee website. Instead of lending money directly and thus needing to transfer it internationally the “social guarantor” provides a cash collateral. This enables the small entrepreneur in the developing country to get a loan from a local bank, which he otherwise would be unable to obtain.

Bhalchander Vishwanath, founder and CEO of United Prosperity answered my questions on the new service.

P2P-Banking.com: What makes the guarantee model better then other lending models (e.g. Kiva or MyC4)?

Bhalchander Vishwanath:

  1. Maximum impact: Due to United Prosperity’s innovative guarantee model which involves risk sharing with the bank, $1 in guarantee by the social guarantor could lead to $2 to $5 in loan to the borrower thus maximizing their dollar’s impact.
  2. Local linkages: Our guarantee facilitates the creation of local linkages between domestic banks, MFIs and poor entrepreneurs. In the course of repaying the loan, both the entrepreneur and the MFIs develop credit histories that will enable them to access more funds at a later date with a lower guarantee percentage, or even without a guarantee. MFIs also get to form relationships with banks and offer other products like savings, insurance, money transfer etc. through the bank.
  3. No foreign exchange risk: Since the loans from Bank to MFI and MFI to entrepreneur are in local currency, there is no foreign exchange risk involved. Most of the smaller MFIs do not have forex hedging capability and our model overcomes that.
  4. Reduced interest: Our guarantee reduces the interest the bank will charge the MFI since the bank’s risk is lower. Some of the interest benefits get passed on to the borrower.
  5. Scalability:  There is enough money available in the developing countries. Our guarantee frees up those funds. It  utilizes capital available effectively and in the long term it is a more scalable model.
  6. Manages risk better: We get the additional benefit of monitoring of the loan by the bank which is not available with other person to person models.

P2P-Banking.com: How does “$1 in guarantee by the social guarantor could lead to $2 to $5 in loans” work? What determines the applicable ratio?

Bhalchander Vishwanath: The ratio is dependent on several factors. These include the MFI’s or borrower’s prior credit history with the bank or other banks, various banks internal guidelines, their focus on lending to Microfinance institutions and so on. For example for a given MFI we have seen two different banks asking for different guarantee  percentages.

P2P-Banking.com: Does the Guarantor earn any interest?

Bhalchander Vishwanath: Guarantors do not earn any interest on their guarantees for two reasons:

  1. It is legally complex.
  2. We see ourselves as a ‘social business’. Nobel Laureate Mohammad Yunus states that a social business is ‘designed to be both self-sustaining and to maximize social returns’. We have only one objective: to combat global poverty. As a result, we do not provide any financial returns or interest to our social guarantors and hope to attract social guarantors who share our objective.

P2P-Banking.com: Does the Guarantor actually have to pay money into an account, or does this only occur if the borrower fails to pay back the loan?

Bhalchander Vishwanath: The guarantee we offer to banks is a cash secured guarantee. Thus the guarantor has to pay the money upfront. Once the loan is paid back, the money can be withdrawn. Continue reading

RangDe – social lending in India

Rangde logoIndian non-profit RangDe.org attempts to bridge the gap between the developed and the developing India. To fight poverty it wants to make microcredit available to everyone at affordable rates. Individual lenders (investors) can lend as little as 1,000 Indian Rupees (approx. 21 US$).

Rangde statsLenders can select a borrower by browsing profiles. RangDe’s field partners receive and disburse the loan to the borrower, which pays a fixed interest rate of 8.5%, of which the field partner receives 5% and the lender receives 3.5%. Lenders need an Indian bank account to participate.

According to their blog, RangDe evolved over the past 7 months and launched the current version of the website in August.

RangDe aims to finance itself by generating advertising revenues.

RangDe was financed by a 6,000 US$ investment of the founders along with a 33,000 US$ loan by a group of engineers. Additionally India’s ICICI Group’s Foundation for Inclusive Growth has agreed to pay for RangDe’s operations for a year. (Source: Microcapital.org)

Meanwhile Indian p2p lending startup dhanax, which was covered earlier (see: dhanax brings p2p lending to india). received funding from Morpheus Ventures. (Source: WatBlog)

DhanaX brings p2p lending to India

DhanaX.com introduces p2p lending to India. Lenders can loan to borrowers that a screened by an "agent". The agents typically are small microfinance organisations, rural technology centers or non goverment organizations. One current example is the SOS Family Strength Organisation of Dr. Hermann Gmeiner. Since there is no established credit rating system in India, agents will check the ability of the borrower to repay the loan looking at 40 parameters like borrowers income, stability, occupation.

Some key facts on the dhanaX lending model:

  • Lenders can either loan to a single borrower or diversify and fund multiple loans with small amounts
  • Minimum investment for lenders is 1,000 Rs (approx 23 US$)
  • Maximum investment per lender is 1 million Rs
  • Borrower can borrow up to 20,000 Rs (approx. 460 US$)
  • Fees: dhanaX charges lenders a 100 Rs sign up fee and 1.5% fee of the monthly repayments. Borrowers are charged 6.5% of the loan amount
  • Only Indian nationals can lend, non-resident Indians can lend provided their bank account matches certain specifications

Siva Prasad Cotipalli and Prashant Mishra founded dhanaX using family and friends, prize money from a business plan competition and funds from an angel investor. They talk about the aspects of entrepreneurship in India in a "Making Of" video.