Why the P2P lending segment is staging a strong comeback after a lull

Initiatives to make returns more attractive and spread risks in order to keep the default rate low for individual lenders have spurred interest in this segment once again

Two fintech unicorns -- BharatPe and Cred -- entered the peer-to-peer lending segment recently. While BharatPe promises an interest rate of up to 12% for both individual lenders and borrowers on its P2P platform, Cred has set a far lower interest rate of 9%. This has created renewed interest in the space, which has not seen any major funding activity in the past few years.

“P2P is a great opportunity that hasn’t really taken off all these years, primarily for the lack of great models to push it as well as lack of customer trust. The market is picking up for P2P now with new age fintech companies launching innovative products,” said Suhai Sameer, CEO of BharatPe.

P2P lending platforms are marketplaces for loans. They connect individual borrowers and lenders in lieu of a platform commission that is in the low single digits. A slew of such platforms, like Faircent, LenDenClub, Billionloans, Finzy and several others, had gained prominence around 2015-16. However, most of the platforms did not see their loan books grow significantly in the following years and lenders shunned them due to poor recoveries. 

The last nail in the coffin was driven by a P2P credit bust in China in 2019 that left millions of individual creditors in the lurch. Beijing banned such platforms in the aftermath and this had a chilling effect on the segment the world over, including India.

It is believed that regulation is the best disinfectant in a new business segment. That’s why after the RBI came out with a bunch of norms to regulate the peer-to-peer lending sector in October 2017, the fintech industry thought that the segment will see a new wave of VC funding. And that individual lenders, the lifeblood of a P2P lending business, will jump into the space encouraged by the central bank’s watch.

One reason was that the cap on a lender was fixed at Rs 10 lakh across platforms. After several requests and representations made by the players, the RBI increased the cap to Rs 50 lakh in late 2019.

But that did not happen. Siddarth Pai, Founding Partner at VC firm 3one4 Capital, said “The cap of Rs 50 lakh on a P2P lender is a glass ceiling that makes exponential scale next to impossible. The unintended consequence of this measure is that competition will be sparse, resulting in a winner-takes-all market"

“For both Cred and BharatPe, P2P credit is more of a feature in a bouquet of offerings and not the core business model. They will find it difficult to scale-up in this space if the RBI does not increase the cap in the future,” added Siddarth Pai who is also an investor in P2P loan platform, Faircent.

Faircent, which promises lenders a return of up to 25 per cent whereas borrowers can get loans for interest rates as low as 12 per cent, is one of the major players in the space with a loan book of Rs 2,000 crore. Founded in 2013, it has managed to attract $9.8 million in VC funding as yet.

Another prominent startup in this segment is LenDenClub, which started in 2015 and has got $1.6 million in funding, offers borrowers interest rates starting from 9.5 per cent and says lenders can expect returns of up to 12 per cent. The platform registered loan disbursements close to Rs 600 crore in FY20-21 as against Rs 60 crore in FY19-20 and Rs 13 crore in FY18-19.

Unusually for a VC-funded tech startup, LenDenClub turned profitable in its sixth year of operations in FY21. Founder and CEO Bhavin Patel said “We have been operationally profitable for the last four years and we are in a position to do better than the goal of disbursing Rs 1,200 crore of loans through the platform we had set for FY21.”

“The most important number in any lending business is the net interest income for the lender. Let’s say a loan is given at 18 per cent, default rate is 4 per cent and 2 per cent fee is taken by the platform. That means the net interest for lenders would be 12 per cent,” explained Patel.

The biggest risk in unsecured credit is the high chance of defaults. One way the platforms are trying to bring down the risk to an individual lender is by spreading out his/her investment throughout multiple loans. For example, the algorithms of P2P NBFC partners of BharatPe manage the lending in such a manner that each investor is effectively lending to at least 100 people and each borrower is effectively borrowing from at least 30-40 people. This ensures that the impact of a loan default doesn’t make more than an 1 per cent impact on the individual lender’s credit portfolio.

Sameer of BharatPe said: “We have seen huge traction with 12% club, our consumer side offering in the P2P lending space. Within 40 days of launch we have facilitated more than Rs 250 crore in peer-to-peer (P2P) investments through the 12% Club app. We have also facilitated loans of Rs 12 crore through the 12% Club app itself to consumers from our partner NBFCs. By March next year, we want to get to an investment run rate of $100 million a year.”

Anirudh A Damani, managing partner of Artha Venture Fund, is of the opinion that P2P platforms could become banks in the future. “If you look at the market leaders in the US and the UK, Lendingclub and Zopa, respectively, they have now become banks. P2P is the only natural banking option in the fintech space as they not only understand how to lend, but also how to manage people’s money -- what you would call depositors in a bank.”