Over the last couple of years, P2P lending has created an alternative banking model driven by individuals. It has democratized and disrupted one of the vital aspects of traditional banking, namely lending. Today, P2P lenders are the real alt-banks or neo-banks, as they create an efficient alternative credit supply that greatly benefits the economy.
The biggest impetus for the sector was when RBI came out with the master guidelines to regulate the sector. The regulations provided legitimacy, the structure and the ambit of operations for P2P platforms in the country. However, these guidelines were laid out in 2017 and much has changed between then and now. The volume of transactions for P2P has leapfrogged, while many traditional sources of credit are under liquidity pressure.
The RBI and the government have been proactive in coming up with the initial set of regulations, but it is now time for a new set of policies to provide the much needed scale.
To figure out what can be done in 2020, the report of the Steering Committee on Fintech Related Issues is a good place to start. It talks about reforming P2P markets and creating a marketplace model for debt financing. The report highlighted that, “Restrictions distort the level-playing field between fintech companies and traditional insurers, block significant revenue streams, prevent cost efficiencies for both financial services companies as well as fintech firms, thus precluding both innovation and competition.”
It added that a good, but modest beginning in this direction was made when P2P lending mobilized savings from individuals and non-banks. Further, classifying it as a specialized NBFC has enabled these platforms to carry out lending activities and cater to the need of MSMEs, household and individuals.
In terms of a solution the report states that the potential hindrance in terms of restrictions on overall and individual exposure limits may be reviewed and options like allowing Mudra Bank to directly fund or co-fund SMEs and MSMEs through P2P platforms may also be examined as an alternative credit delivery channel.
Hopefully, this will get implemented and this participation will augment the efforts of P2P lending in bringing more individuals and businesses under fast and organized credit at low cost.
Understanding the importance of the P2P lending sector in driving financial inclusion and the potential to ease liquidity, especially for the MSME sector and other under and unserved segments of the society, the RBI in early December 2019 increased the aggregate exposure of a lender to all borrowers at any point of time, across all P2P platforms, to Rs 50 lakh from the earlier Rs 10 lakh. In 2020 we urge the RBI that regulated lenders such as banks and NBFCs should not be constrained at all by a limit on the investment amount.
While small businesses have been largely underserved, fintech has the power to cater to this segment. Thus, world over several policy measures have been enacted to ensure P2P lending flourishes. Governments in advanced economies such as the UK and the USA have supported the sector through their taxation policies.
For example, in the UK, P2P loans qualify for ISA (Individual Savings Accounts) investments. In addition, tax-payers can offset or write-off bad-debts in one P2P company against interest earned at another P2P company. Also, losses can be carried forward for 4 years.
Similar facilitative tax policy is needed in India. Interest earnings on P2P loans to SME/MSMEs should be made tax-free, putting them on par with tax-free bonds and P2P lenders should be able to offset or write-off bad debts. The outcome will be to encourage P2P lenders to provide loans for this vital credit-starved sector.
2020 should also see a lot more collaborations involving everyone from traditional banks to cooperation between different fintech players and even the government. The root idea should be to come up with data and information that can add value to the credit decision making. One way to come up with innovative methods of credit scoring, risk assessment and disbursement would be to, perhaps, integrate GSTN and platform like TReDS to get a better picture about the business.
Another aspect that the entire industry needs to look at is blockchain as a public infrastructure to eliminate fraud and forgery that is possible with paper-based documentation. In fact, the Steering Committee also cites the example of Populous in the UK and the Hive Project in Slovenia, which are used to ascertain the legitimacy of an invoice. Greater use of regtech methods that includes something as basic as eKYC to bigger use of e-NACH is also needed to service the needs of the MSME sector. Then there are larger issues like setting up a public credit registry that can vastly improve and change the way lending takes place in the country.
There is no doubt about the potential of the sector and in fact both the government and the regulator seem to have acknowledged the fact. Lenders on Faircent have increased 8 times from Jan 2019 to Dec 2019 and this number is expected to further extrapolate 20-fold in 2020. In the year 2020 policy effort should be directed at ironing out some procedural issues and largely around allowing all stakeholders in the lending domain to undertake better credit appraisals.
While it will be beneficial for the MSME community, for lenders on the platform, P2P will get firmly established as a new age investment option, competing with other market linked options such as MFs and stocks.
Rajat Gandhi is founder and CEO of Faircent.com. The views in this article are his own.