It doesn’t look like Primiya Bai Rout, a vegetable cultivator in Salebhata village of Odisha, belongs in cyberspace. Yet, there she is, with a profile that nestles right next to Niharika Padia’s from New York. It is an unlikely pairing, but what has made it possible is a loan of Rs 400, given by Padia to Rout, so she can finance her vegetable business, thanks to Rangde — an online platform that enables people like Niharika to choose borrowers like Rout from a list of microloan seekers in the most remote corners of India.
This is the new face of microfinance — e-microlending — that hinges on a peer-to-peer (P2P) model. The company that has made this possible, is Kiva, the world’s largest peer-to-peer lending platform, based in San Francisco, USA, that only a month or so ago announced its entry into the Indian market. Famous for the $25 loan (one can lend as little as $25 to a person of his or her choice anywhere in the world), Kiva has around 800,000 individual lenders, who have funded $340 million in loans for 840,000 borrowers in about 63 countries. In fact, Kiva is the inspiration behind all domestic P2P lending companies, such as Milaap, Rangde and MicroGram.
In a typical P2P model, a website publishes a list of loan seekers. A prospective lender chooses the borrower of his or her choice, makes payments through an online platform and gets monthly or quarterly payments on the loan, either with or without profit. The website facilitating this is run either on donations or fees charged to lenders and borrowers. Business models are varied.
Organisations like Kiva, for instance, do not give returns to investors, as they provide interest-free loans to their borrowers, while smaller domestic outfits do. Most of the international social investment websites cater to the underprivileged in Latin American and African countries.
Domestic P2P players have diverse business models. For example, while MicroGram offers up to eight per cent return to lenders, Milaap offers no returns (it sends gift cards instead). Both organisations lend to microfinance institutions (MFIs) or non-governmental organisations (NGOs), which, in turn, lend to rural borrowers in a group-lending model. On the other end of the range are companies like I-Lend, a Hyderabad-based outfit which started operations three months ago. Borrowers of I-Lend can apply for loans anywhere between Rs 25,000 and Rs 3 lakh, while lenders can lend a minimum of Rs 5,000. I-Lend borrowers are mostly urban youth in need of personal or business loans, and the sole objective of lending in I-Lend is a high return.
So far, the growth of the Indian P2P companies has been impressive. In the past four and a half years, Rangde has lent about Rs 9 crore to 16,000 clients, with 90 per cent of the funding coming from retail investors and is looking to expand its portfolio to Rs 50 crore in the next two years. Milaap, in the last two years, has lent about Rs 2 crore, while MicroGram about Rs 2. 5 crore. Roughly half of these amounts has come from individuals.
“Despite being a relatively new concept, the response has been pretty good,” says Shubhashree Sangameswaran, communications manager, Milap. “In India, we generally are familiar with either donations or financial investments. We are trying to find a mid-point between the extremes. The response from young techies, college students and successful entrepreneurs has been quite encouraging,” she adds.
These are considerable strides for a radically new business. However, the real challenge for P2P lending in India is faced by international companies, which have to wade through a number of regulatory challenges to operate here.
Kiva finds a way
Kiva has been trying to evolve an India-specific business model for quite some time. The main challenge came from the Reserve Bank of India (RBI), which does not allow foreign nationals to lend directly to Indians. Thus, Kiva had to tweak its peer-to-peer lending model. The money raised from lenders in Kiva had to come in as external commercial borrowings (ECB) to Indians. These individual loans, pooled as ECBs, had to be transferred to a microfinance agency or NGO (called field partners), who, in turn, could lend to actual micro-borrowers.
Another, RBI regulation requires that loans made to non-government microfinance institutions have a minimum term of three years. To comply with this, field partners of Kiva will hold on to loan funds for a three-year term before sending repayments to lenders. Kiva has allied with three non-profit organisations — the People’s Forum and the Mahashakti Foundation in Odisha and the WSDS-Initiate in Manipur, which will act as Kiva’s field partners in India. Thus, funds will only be sent to Kiva and repaid to lenders after three years, and not as borrowers repay. During this time, the field partners will regularly collect repayments from borrowers. Thus, Kiva will not provide regular repayment updates during India loan terms, like it does for other loans. Instead, lenders will receive loan status details with their eventual repayment.
Kiva is looking for collaboration with more field partners in India, who are selected after about three months of evaluation processes and compliance with close to 67 indicators. “We found three non-profit organisations that meet that criteria in every way and are truly dedicated to the people they serve. We are continuing to seek partner organisations in India that meet this criteria and are interested in providing new loan product types,” says Premal Shah, president of Kiva.
Kiva’s model involves giving interest- free loans to MFIs. However, MFIs don’t repeat that favour to their borrowers. “If you provide interest-free loans to borrowers in India, no one will pay back, as they will think this to be government money,” says Jugal Kishore Pattnayak, CEO and managing director, Mahshakti Founation, one of the field partners of Kiva in India.
In order to comply with Kiva’s philosophy of affordable loans to the poor, the Mahshakti Founation devised a lower interest rates slab product, targeting the poorest of the poor people. The foundation charges are between four and five per cent interest rates for such loans, even though it gets interest-free loans from Kiva. Similarly, the People’s Foundation lends at a four per cent interest rate to a selective group of people. The MFIs justify charging interest rates for meeting their operational costs. The profit margins, they say, will be used for starting skill development programmes.
“We want to make MFIs affordable, as well as provide return to our investors. The challenge is how to give a six-eight per cent return, and keep the borrowing cost at 16 per cent,” says Rangan Varadan, CEO, MicroGram. The company gives loans at 15 per cent. While the lender gets a six per cent return, MicroGram keeps a 1.6 per cent margin. The rest, about 6.5 per cent, goes to the NGO or field partner.
This new arena in microfinance will undoubtedly have its fair share of hurdles. Already, there is talk of the RBI keeping close tabs on it and a regulatory act in the future cannot be ruled out. Still, it is an innovative and timely new way of helping the neediest.