Peer-to-peer firms need entry into secured lending, says Rajat Gandhi

The Reserve Bank of India's FSR of December 2021 had also highlighted that given the level of inflation, investors are looking for a certain level of returns, and P2P platforms offer an incentive

Peer-to-peer (P2P) lending -- basically crowd-funding -- has seen exponential growth in recent years with aggregate exposure now close to Rs 5,000 crore -- more than double the projection made in the Financial Stability Report (FSR) of December 2021. This was mainly because lenders on these platforms are searching for higher yields. Rajat Gandhi, founder and chief executive officer of Faircent.com, the country’s largest P2P firm, spoke with Raghu Mohan.
Edited excerpts:

What explains the exponential growth in P2P lending, even as legacy lenders are growing their footprint?
 

There’s a huge underserved and unserved market. That’s why P2P firms came into play in the first place and during Covid, this trend accelerated. And we are no more an “alternative” platform, but very much part of the lending ecosystem. Banks and non-bank lenders place primacy on their existing relationships. But from a fresh origination point and expansion of the market, we are doing it in a big way. This is not to suggest that others are not.
 

The other aspect is that with the flux around digital lending, many P2P players started to fill this vacuum. As a lot of digital regulation was happening anyway, customers started moving towards P2P players.

Can you profile the typical P2P customer for us?
 

On the supply side (those who lend on the platform), typically, this customer is either self-employed with enough cash, or is in business with investments of up to Rs10 million, which could be a mix of stocks and fixed assets. In our case, we have a skew towards the self-employed, businessmen and professionals.
 

Those are the people who have the capital and cash-flows to invest. As for borrowers, our average loan ticket-size is around Rs120,000, availed of by small businesses like mobile outlets, kirana stores, or rice mills. The average tenure of a loan is around 18-20 months, though we do give loans of up to 36 months.

What is in it for people to lend through a P2P platform when they can invest elsewhere – say, in debt mutual funds or stocks?
 

Even when you invest in a debt mutual fund, it typically has exposure to two, five or ten companies. You have a huge concentration risk. The stock markets are volatile and not everybody can take that risk. P2P is a relatively new asset class. So, I think it does have a certain amount of attraction. And, most importantly, it doesn’t have the stock markets’ volatility which is influenced by global factors, something most retail investors don’t understand anyway.
 

The Reserve Bank of India’s (RBI’s) FSR of December 2021 had also highlighted that given the level of inflation, investors are looking for a certain level of returns, and P2P platforms offer an incentive. The point is, it removes the instability of the markets. It’s not something which you have to monitor on a daily basis. You basically know what returns you are going to get, be it 10, 12 or 15 per cent -- unless, of course, a lot of borrowers were to default at the same time.

Is there an auction system at work here? How do you match lenders with borrowers?
 

We started with auctions, but discontinued it because not much of it was taking place. And the   customers out here are very different. They want money quickly, and auctions take time. They didn’t have the patience to wait for 24 hours for offers to be accepted, rejected and get defined.
 

Another aspect was that borrowers would agree to loan pricing in the hope that they could service it and lenders were greedy. Price discovery (through auctions) was not happening, and we did away with it. We now have a straightforward model wherein we fix the price (interest rate). It’s for borrowers to accept or reject the offer. The platform decides the pricing with borrowers rather than being settled between lenders (on the platform) and borrowers.

The loan-book of P2P firms is entirely unsecured as on date. Do you think there’s a case for stipulating that a part of it be secured from a risk perspective?
 

In the long term, I think, the RBI should allow us to get into asset-based lending. This will help the loan portfolio to be stabilised, enable the longer-term to be extended and better-set borrowers to come in. So, for profitability, feasibility and stability of P2P platforms, secured lending will help. A single product profile -- unsecured -- is unviable, and a threat to the platforms.

Given the unsecured nature of loans and the small ticket-sizes, what is the recourse in case of defaults?
 

We will serve a notice to the borrower under Section 138 of the Negotiable Instruments Act (1881) in such situations. The arbitrator can pass a decree for attaching your property also. There are a lot of tools (for recovery). And of course, it’s time-consuming, but it’s not some kind of a “Wild West” out there. You can’t just not pay and go scot-free. As for delinquency rates, we are operating at around five or six per cent. Even large banks have this level of delinquency in the unsecured-loan segment.