Rajiv Yadav, who used to work for Bharti Airtel, started lending on peer-topeer lending platform Faircent a year ago. He plans to invest Rs 50 lakh in this channel and to make it his retirement plan. Yadav makes sure he lends only to salaried individuals and not more than Rs 50,000.
“I have burnt my hands in share trading. This investment is less risky and gives returns equivalent to real estate. Money will get doubled in three to five years,” he said enthusiastically. There are about 15 peer-to-peer or P2P lending platforms in India, facilitating unsecured loans, governed only by their internal policies. All these platforms have come up in the past 18 months, with at least three funded players, the largest being Faircent, which has raised over $4.25 million (about Rs 28 crore) so far.
Interest rates are decided by the users, while the lenders choose who they lend to and at what rate, and the borrowers choose from the offers they have received. On an average, the lending rates are 20-24%. Like Yadav, many Indians are attracted to this new investment avenue that promises better returns than banks and ensures returns on a monthly basis.
It is not everybody’s game though. Gurgaon-based Faircent, for instance, allows only people with property and experience in share trading to become lenders. “It is a risk-based investment, a complex product where people need to have a level of financial acumen to invest,” said Rajat Gandhi, the founder. Every loan on P2P platforms is shared by multiple lenders to reduce risk. Even if someone defaults on their monthly payment, these platforms have mechanisms in place to reduce the burden on the lender.
“The probability of default in our credit model is 0.1%,” said Bhavin Patel, founder of Mumbai-based LendenClub. “To protect our lenders even from that, we have created a lender protection fund, kept aside from our revenue.” This fund is used to repay what is owed to the lender even as the company’s lawyers take legal action for recovery. The most common legal action is to file a case of dishonour of cheque against the borrower (who has submitted post-dated cheques for his/her monthly repayments), as Faircent does.
Gandhi said the possibility of being charged with a criminal offence acts as an effective deterrent, as the one-year-old startup has never had to deal with an accruing default. Minimal documentation and quick processing of loans draw borrowers to these platforms, but these aspects raise serious concerns about the model. While both borrowers and lenders are verified, the source of the lender’s income and the use of the borrowed money cannot be questioned, as there are no regulations governing these entities.
Globally, the P2P lending market has been successful in the US, the UK and China. While the US and the UK have a handful of major players, China has thousands. China saw an uncontrolled proliferation of lending platforms in a short span and a fair share of failures. The government was forced to introduce regulations earlier this year.