Corruption Targeted with Currency Ban

Today, the Modi Government announced a currency ban on India’s largest notes, the Rs 500 and the Rs 1000. Prime Minister Modi said this is in an attempt to fight corruption and that banks will be closed on Wednesday to prepare for this adjustment. A plan is in place to exchange these currency notes in between now and the end of the year at banks across the country.

This move fights corruption through the reduction of bribes/black money, as well as counterfeit money that circulates in the economy. Inflation should drop as well, both of these being good for the common Indian citizens.

Cash-based sectors like agriculture, logistics, and tourism will be hit hard at first but in the long run, prices will come down and stabilize with less ‘dirty’ money in the system. Commodities as an investment may suffer for a while.

The ban helps all established funding options including banks and peer to peer lending platforms in India.

Ban Benefits Legitimate Banking and P2P Lending Options

For most people, the most accessible investment option is real estate. In the short term, this ban is likely to lead to a correction in home and land prices. In the long term, more property will be affordable for more middle income and average citizens. The ban is good for long-term real estate buyers but things could be bumpy between now and then especially those investing in property for growth.

With an expected correction in real estate and the need to engage with a bank to trade in the notes, the Jan Dhan financial inclusion program should benefit bringing more people into the banking and financial sector. More people in banking and finance means more people to get into p2p lending.

More money into the banking system means that the unofficial methods of social lending that occur throughout the country that is done in cash are likely to decline and official channels like p2p lending platforms like i2iFunding should benefit.

Peer to Peer lending should overtake unofficial cash lending as the increased accountability benefits borrowers and investors. People don’t want to walk around with huge numbers of small bills just to lend them out. As an investor, it is easy to invest in P2P loans and get that money working for you in a market unaffected by this ban, unlike stock, commodities or real estate markets.

While some of our self-employed borrowers who operate cash businesses could be impacted, we think this effect will be minor and last only a very short time. The benefits should far outweigh this one risk in the p2p lending market. P2P lending continues to be one of the most attractive investment options in India and this ban only further reinforces this. Unlike real estate, stock or commodities, there should be no material impact to our market as a result of the currency ban.

P2P Lending Regulation Likely on Hold

The RBI has advised on what they think regulation for the p2p lending market should look like back in the spring. We have not seen much movement from the RBI since then. We expect this to continue now that they will be busy putting this ban in place and working with banks on the trading and confiscating of the larger notes within the economy.

Smart platforms are already working under the expectation of being classified as a NBFC (non-bank financial company). The regulatory environment is likely to stay where it is while implementing this very labor intensive ban.

Many of the bumps we will be feeling as a result of this ban will be temporary. Long-term outlooks for many of our markets are better as a result of getting the corruption, counterfeit funds, black money and unofficial lending channels out of the system. In the meantime, p2p lending is well positioned to benefit from the ban with no to minimal impact.