What the future holds for the P2P lending market in India and the world: Rajat Gandhi

The online P2P lending market in India is at a nascent stage, but has picked up pace over the past two years. While the overall internet-based alternative finance industry registered transactions worth more than $57 million between 2013 and 2015, online peer-to-peer or marketplace lending saw loans with a cumulative value of over $2 million disbursed during the same period. The total loan value in the corresponding two years has grown by around $2 million, with an estimated $4.5 million worth of loans disbursed through online peer-to-peer lending platforms by the end of 2016.

These numbers, along with the sheer volume of unutilized funds and the growing demand for loans by individuals and businesses, are clearly indicative of the potential that lies within the Indian market for online lending. But even as industry projections predict the market for peer-to-peer loans to be worth $4-5 billion by the end of 2023, this promising segment is still a long way off from achieving its true potential as a highly viable alternative investment class.

Future is India Stack

The launch of India’s Digital Stack that includes Aadhar, eKYC and digital payments is paving the way for the country’s shift towards a cashless economy. Recent government policies and initiatives favor the fintech sector and have been encouraging innovation in products through a wide-spread adoption of technology in the financial sector, whilst also urging traditional banks and financial institutions to up their game. Consumer demands are evolving, and emerging sectors like online P2P lending are best positioned to address them.

The Indian P2P lending sector currently has some highly promising players that will propel growth in the industry on the basis of a strong back-end system and robust processes. The year 2017 is expected to be the year of financial technology, with alternative lending and investment products like peer-to-peer lending set to be driving forces for the latest iteration of the fintech revolution in India.

Futures is a new asset class for investors

Greater convenience for borrowers is not the only reason why online P2P lending is gaining traction in the Indian market. Investors are quickly turning to P2P lending platforms as a new alternative asset class. P2P lending offers the advantage of fixed and higher returns not vulnerable to market turbulence, and that’s where it is winning over traditional market-linked investment instruments. Faircent.com, for example, has consistently delivered net returns upwards of 18% per annum to its majority of lenders. Another aspect, which appeals to Indian lenders, is the fact that such platforms offer flexible liquidity to investors without a full-fledged long-term or short-term lock-in period. Investments facilitated through online P2P lending platforms also start generating returns from the following month in the form of EMIs, which can then be used by investors to further diversify their portfolio.

Online P2P lending platforms is evolving into a viable and highly profitable alternative asset class and competing with mutual funds and equity, expected to appropriate nearly 15-20% of the investment portfolio of investors in the next few years.

Future is SMEs & MSME Financing

The huge business potential in MSME financing has led to rapid growth for the online P2P lending domain. These fintech companies are improving access to finance for SMEs by facilitating loans and reducing costs by connecting them to individual lenders, banks and financial institutions.By leveraging technologies and the ubiquity of smartphones, online P2P lending companies are targeting the large underserved segment of SME financing, enabling small businesses to benefit from the slew of innovative and convenient credit products. MSME borrowers can apply for loans online within a few minutes, select their preferred repayment terms and receive funds in their bank accounts within 2-3 days.

Future is Light Touch Regulations

A significant factor holding the online P2P lending market back is the lack of regulation in the sector. The absence of an overarching regulatory framework to establish guidelines for the sector is one of the major reasons behind the distinct dearth of VC investments into Indian P2P lending start-ups.

This, though, is set to change– the Reserve Bank of India issued a consultation paper in April 2016 proposing to bring P2P lending platforms under its purview by categorizing them as NBFCs. An official recognition of the online P2P lending model and a clear set of guidelines defined by the RBI will give impetus to the sector, attracting lenders and investors to these platforms. Regulations will be welcome in the sector, as long as they are not too stringent and do not curb innovation. In fact, favorable guidelines might actually lead to the growth of an innovative, efficient and accessible avenue for borrowers who either do not have access to formal financial channels or are denied loans by them.

Markets such as Canada and the UK regulate P2P platforms as an intermediary, while France and Germany regard it as similar to a bank. Even in the US, regulations do exist and vary from state to state. In the Asian P2P lending markets, countries like China, Indonesia, Malaysia and UAE have introduced regulations in the sector, and as a result, have seen a massive boost in confidence among investors and venture capitalists. The Indian sector will, once regulated, also witness an increase in investor activity as well as the size of funding. The result will be a strong, well-funded P2P ecosystem capable of complementing the traditional banking segment and even competing with players in the global market.