Covid-19: Post paycuts, young salaried look up to P2P platforms for loans

Amidst a spate of pay cuts in the corporate sector,  the demand for loans in Peer to peer (P2P) lending platforms, which mostly cater to subprime borrowers, has increased dramatically. However, with investors facing defaults, lending has significantly slowed down.

Much of this demand is coming from young salaried professionals, who have faced pay cuts in recent days.

With no upper limit, the interest rates in the platform can go as high as 35 per cent, on a reducing balance. However, even with high-interest rates, many investors are turning away the loan proposals.

“As there are a lot of delays in salaries, the demand for loans has substantially increased from salaried class, mostly younger professionals who are outside their hometown. In addition, we are also witnessing high demand from small businesses,” says Ekmmeet Singh, CEO, Lenbox. The company is able to meet only about 60 per cent of the demand, and most of the lenders in the platform are preferring giving loans to MSMEs. For salaries people, close to 50 per cent of the proposals are getting rejected.

Also, many P2P platforms have voluntarily extended the moratorium to on loans. Notably, P2P platforms only act as a marketplace, while loans are given by individual lenders.

“Queries for loans has increased dramatically. The demand on a daily basis ha increased two times. While there are investors in the market, it is the question of cash flows. For the month of March, EMIs have been partially impacted. In our system, only 20 per cent of borrowers have availed moratorium,” according to Amit More, founder, Finzy, a P2P platform offering loans for a longer tenure of 36 months.

The defaults are more in loans for shorter tenure, which require monthly or quarterly repayments.

Also, while many urban-centric P2P lenders have been witnessing more than 50 per cent default rate over the past month, the defaults for rural-focused lenders have been only about 20 per cent.

“Overall, in the industry, there is a severe decline in collections. However, for a rural centric platform like us, the scenario is much better. Our April collections are 80 per cent. In the supply side there is constraint,” said Rajiv M Ranjan, Founder and Chief Managing Director of PaisaDukan.

Before Covid-19, P2P lenders, who mostly cater to subprime borrowers, have been almost immune to slow down.  A sunrise sector in the Indian financial sector landscape has grown by more than 10 times in the last year.

According to Rangan Varadan, Co-Founder of Microgram, while the defaults in the rural areas are lower compared to urban areas, the announcement of moratorium has led to defaults. Also, the firm has voluntarily given a three months’ moratorium to its borrowers, while going slow on fresh lending.

The growth of the P2P sector has been propelled by recognition from Reserve Bank of India (RBI), which now regulates the sector under a separate category called P2P NBFC (non-banking finance company). Further, in December 2019, the regulator relaxed P2P lending norms by increasing individual lending limit across platforms from Rs 10 lakh to Rs 50 lakh.  

According to Abhishek Gandhi, Co-Founder, RupeeCircle, one of the biggest urban-centric P2P platforms, the defaults have been about 30 per cent.

In a typical   P2P model, a website publishes a list of loan-seekers, often financially excluded customers, who mostly meet their credit demands from moneylenders. A prospective lender chooses the borrower of their choice, makes payments through an online platform and gets monthly or quarterly payments on the loan, with an average return of 16-18, going as high as 25 per cent.