P2P Lending industry in 2017 – A year of recognition

A closer look at what changed for the P2P Lending industry in 2017

With technological innovations and changing dynamics of lending business, the new business model of Peer-to-Peer (P2P) Lending emerged. The essential model based on peer-to-peer trust, connects borrowers and lenders directly; eliminating the need to go to banks for the lending and borrowing activities. On a global platform, the P2P industry turned out to the hub for prime and subprime borrowers to get easy access to credit. P2P Lending industry in 2017, got major phillip by RBI in India.

In India, the Peer-to-Peer (P2P) lending industry is a sunrise industry within the financial services sector. The industry experimented initially without having to comply with stringent norms. This helped the industry enjoy a free run for the first few years. The recent NBFC status, bringing all P2P platforms under the purview of RBI regulations has helped the industry stand on the cusp of significant transformation.

1. RBI regulations brought in recognition to the entire P2P Lending industry in 2017

RBI regulations brought recognition to P2P Lending industry in 2017

RBI regulating the NBFC-P2Ps is a long-term positive for the Indian P2P lending industry; a move, which will help in substantially increasing the industry’s recognition in India. The guidelines are expected to remove non-serious dummy players from the market, giving more credibility to the sector. The P2P lending is already seeing an uptrend, which will be further fueled by the new guidelines. This will bring in more avenues for the borrowers and lenders. It will also ensure that they are dealing only with the serious players. Chances of their falling prey to fraudulent practices will reduce significantly with new norms for the sector coming into being.

The guidelines have brought in more transparency to the sector, making it mandatory for the platforms to reveal the composition and loan performance of the loan portfolio. Consequently, all P2P lending platforms in India will be more responsible while making any performance claim to lure the investors or borrowers. Improved transparency will also ensure that the platforms do a thorough credit analysis before listing any project for the disbursal providing more security to lender’s investment.

2. The competition increased

In India, there are at least fifty P2P lending platforms in operation at present; out of which 8-10 are prominent. Until recently there were only about 10-15 players and top 3-5 platforms enjoyed a high market share. With more platforms joining the bandwagon, competition in the Indian P2P industry has increased considerably. Some platforms raised money which they are planning to utilise for further expansion of the business. To attract more customers, the platforms are adopting greater automation and have been launching sophisticated products focused on satisfying specific needs of the borrowers.

3. More borrowers approached P2P lending platforms

After demonetisation, the business of private money lenders got severely impacted. Taking advantage of this, P2P lending industry grabbed the bigger pie of the untapped credit market that was primarily depending on the unorganised credit sources until then.  Leading P2P lending platforms have been disbursing around Rs 5-7 crores worth loans every month cumulatively, and their outstanding loan book hovers at Rs 60-80 crores now. (Estimated industry figures by i2ifunding).

Interestingly, ticket size per borrower has been rising too. First time borrowers with no credit history are increasingly relying on P2P lending platforms for meeting their credit requirements. Loan queries for credit consolidation, house renovation, medical emergencies, education and working capital are increasing steadily.

4. Investor base grew steadily

Since banks were awash with liquidity post demonetisation, interest rates on deposits fell sharply in 2017. As a result, investors chased other investment avenues in search of higher yields. As you might be aware, P2P platforms eliminate the banking channel and connect investors and borrowers directly, the cost savings for running the entire chain of intermediaries are saved and passed on to the borrowers and lenders proportionately. As a result, the lenders at P2P lending platforms remained almost unaffected by the across the board fall in interest rates. Moreover, growing awareness about P2P lending platforms also affected the perception of investors positively thereby attracting more investors. Mouth publicity also played a significant role in getting more borrowers and lenders to the platforms. RBI classifying the P2P lending platforms as NBFCs and issuing prudential guidelines to regulate the sector has boosted investors’ confidence further. Learning from their initial experience, lenders are making repeated investments. To mitigate risks, they are diversifying across platforms and categories of borrowers.

5. Increasing defaults made serious platforms more prudent

In the wake of demonetisation underwriting mistakes made by the P2P lending platforms during the early stage of development proved costly. For some platforms which did not focus on credit evaluation, the rate of default jumped close to 6%-8% of disbursed loans. However, serious platforms who have been investing heavily in creating robust credit evaluation processes and systems, have managed to escape unscathed. Other players took a note of this and have introduced some fundamental changes in the risk management processes. The corrective measures are expected to keep a lid on loan defaults.

6. Technological prowess of the platforms increased

To facilitate the future growth, P2P lending platforms have been investing heavily in expanding their technological capabilities. The aim has been to keep borrowers and lenders engaged with the platform and gather more significant information from them. This is critical in taking data-backed decisions. The platforms are launching apps and using social networking mediums to analyse the borrowers’ profile more accurately. Platforms are launching new features almost every month, which is helping the platforms better service their lenders and borrowers.

In a nutshell

Year 2017 has been a pivotal year for P2P lending platforms in India. P2P Lending industry in 2017 recorded healthy growth and continued to expand its customer base. Since the sector is still in its early days of development, it faced a few unprecedented challenges too—especially in the aftermath of demonetisation. Nonetheless, leading industry players figured out a way to deal with challenges efficiently. RBI awarding the status of NBFC—Non-Banking Financial Company to the P2P lending sector would take the credibility of the industry to new highs in coming years.