The rise of P2P lending platforms

Gurgaon-based Sahil Singh, a chef by profession, had applied for a house refurbishing loan of ₹3 lakh. His application was rejected by the bank because of low CIBIL score. It was then that he stumbled upon i2i Funding.com, a peer-to-peer (P2P) lending company, and obtained the loan.

Having paid off the first loan, he has now taken two more from the same company.

On the other side is 31-year-old Arpit Sabharwal, a Mumbai-based businessman, and lender on P2P platform Faircent. Arpit’s portfolio stands at ₹4 lakh and returns have been around 17 to 19 per cent. He is now re-allocating some of his mutual fund portfolio to the peer-to-peer lending platform.

At a time when banks have tightened their purse strings, thanks to mounting bad loans, peer-to-peer lending platforms are witnessing steady traction.

Borrowers, mostly small- and medium-sized ones, are taking to these companies for hassle-free loans. For investors (also called lenders), it is the lure of higher returns.

Peer-to-peer lending platforms refer to those intermediaries that enable loan facilitation services, either via online or through other medium. They cannot receive deposits or lend on their own.

But these platforms are not really risk-free. According to officials, the average default rate is in the range of 5-6 per cent.

For an investor / lender who has the risk appetite, this could be a good bet, market sources said.

The investors or lenders would be allowed to choose from among a set of borrowers on the platform and can diversify their risk by lending to multiple borrowers. Typically, the minimum and maximum amount per borrower is kept at ₹5,000 and ₹50,000, respectively, in order to cap the risk.

Disbursements

According to industry insiders, there has been a near 15-20 per cent growth in loan applications and disbursements (across these platforms) on a month-on-month basis in the last one year.

While bigger players such as Faircent are said to be disbursing close to ₹2 crore a month, others like i2i Funding.com have been disbursing close to ₹60 lakh to ₹1 crore on a monthly basis.

“We are receiving close to 40,000 loan applications a month and we are adding close to 5,000 lenders on our platform each month. Our disbursements are witnessing a 15-20 per cent month-on-month growth,” Rajat Gandhi, Founder and CEO, Faircent, told BusinessLine.

Faircent has more than 40,000 registered lenders and close to 3.5 lakh registered borrowers. The total disbursements on the platform stood at close to ₹80 crore.

According to Gandhi, the platform primarily caters to smaller borrowers, who have an average requirement of ₹1-1.25 lakh for wedding, travel, purchases or for business, among others.

The rate of interest on these platforms continues to remain a little above the existing ones in the market. Typically, they vary between 12 per cent and 30 per cent, depending on the borrower and his CIBIL score. The average loan duration is around 18-24 months.

“Earlier, we were disbursing close to ₹30-40 lakh a month; but now, it’s around ₹1 crore a month,” said Raghavendra Pratap Singh, Co-Founder, i2i Funding.com.

Regulatory framework

These platforms are, however, not immune from regulatory framework.

The Reserve Bank of India, in a circular in August last year, mandated such P2P lending companies to obtain requisite approval to register themselves as a non-banking finance company (NBFC).

Faircent is among the first P2P lending platform to receive this NBFC-P2P certification. The other major P2P platform, i2i Funding.com, has already applied for an NBFC licence.

According to the company’s co-founder Singh, initially, there were not many takers for P2P lending platforms. Lack of awareness and ambiguity over regulations were the reasons.

“However, with the central bank asking such companies to register themselves as NBFC, things have started looking up,” he added.