Prolonged slowdown in the corporate sector and the rising bad loans has forced banks to squeeze funding to micro, small and medium enterprises. As a result these small businesses are increasingly turning to online platforms to raise funds.
These online portals works in the space of peer-to-peer lending (P2PL) arrangements, which allows an individual to lend money to other unrelated individuals without assistance from any financial intermediary.
"We have seen more demand coming in from the SME and the MSME sector, especially the ones that are new in the space because they find it difficult to get loan from the banks as they may not have the required income/bank documents etc in place, as a result we have seen an increased demand from this segment," said Vaibhav Pandey, CEO of i2ifunding.com.
As per the Reserve Bank of India data, credit to small industries between January 23, 2015-January 22, 2016 grew at 2.4% as compared to 12.7% a year ago. In the same period, bank credit to medium enterprises degrew by 7.1% compared to a growth of 0.7% a year ago. According to RBI guidelines, micro and small enterprises are those in which the loan size is up to Rs 5 crore.
Shankar Vaddadi, Founder, i-lend.in, another P2P lending platform also terms the SME and MSME category as a "massive segment."
"Since it is very difficult to get an unsecured loan for either first time borrower or people who may not have all the required documents needed by a bank. These people come on to the online platform and avail credit with ease."
Pandey also added that with the demand ha also been increasingly coming from the new players entering the e-commerce segment.
"E-commerce has been a big driver. This is because on one hand we have new players from that segment scouting for funds. And on the other hand because several small entrepreneurs are getting to sell their products online which in turn are leading to an increased demand for capital for which they are coming to us."
This comes at a time when the Reserve Bank of India is looking at ways to regulate this sector. Currently, it does not come under the ambit of the banking regulator. However, considering that this sector has been gaining momentum in the last couple of years, RBI is now looking at monitoring this sector.
Several online portals have sprung up in India to facilitate such lending and some have also secured private funding from investors, but it is still at a nascent stage compared with countries such as the US and China.