According to an International Finance Corp (IFC) – Intellecap report, the credit gap in the country’ small and medium business stands at a staggering $240 billion and the gap seems to be widening every year. Although the formal financial institutions, led by banks, have tried to bridge the chasm, the demand for credit has far outstripped supply.

It is clear that banks alone cannot solve the widening credit gap and hence there is an urgent need to employ a number of financial tools and offerings to plug the gap. Fintech can play a huge role and especially P2P platforms, which have been classified as NBFCs, can be crucial. Let us look at some of the aspects around why P2P lending needs to play a role.

Diversify risk capital providers – Given the size of credit requirement, it is evident that no one source of finance can fill it. For long, banks, various NBFCs and micro-finance institutions were expected to cater to the credit requirements of the country. While they have played a pivotal part in addressing the demand-supply gap, clearly a lot more needs to be done.

There is an urgent need to diversify and strengthen various means of credit available in the country. Diversification is also necessary because credit and finance is a very sentiment driven business that will always have its crest and trough. Over-reliance on one mode of credit is bound to raise issues when and if the sector faces strong headwinds as was evident by the liquidity crisis resultant from the ILFS collapse.    

P2P lending, which is classified as an NBFC, has seen good adoption in a relatively short span of time and its ability to provide credit to numerous small businesses is already well documented. By mobilizing individual funds lying idle to fund demand from businesses and individuals through organized channels, P2P lending helps in economic stimulation and wealth creation.

Information asymmetry – The decision-making process of traditional financial institution is based on a credit-evaluation system that was developed decades ago. The system is set in terms of how to conduct due diligence, the documents needed and the need for collateral as security. However, these standards are not sufficient and are increasingly viewed as keeping a large section of the borrowers outside the ambit of formal sources of finance.

The country needs modern credit assessment models that access extensive data streams beyond the traditional and the obvious. Modern lending techniques like P2P lending has upended the way credit assessment is done and today vast sections of hitherto neglected set of borrowers have the ability to raise money through NBFC-P2P platforms. To address the credit gap, we need to develop new sources of information, which can happen when new financing models operate. For example, at Faircent we go beyond the CIBIL score and understand the ability and intent of the borrower to repay his obligations by evaluating social and personal data.

Industry focus – Different lenders have different focus. Even banks are more likely to be comfortable with some sectors, while may not want to lend in some other. Generally, businesses with little or no collateral, like firms in the services sector, tend to suffer. Sometimes a lender, by the virtue of operating in an industry for long, becomes specialized in that, while in other cases it may be centered around the risk and reward involved. Economic conditions also play a big part, which means if the outlook for the infrastructure industry does not look too promising, businesses involved in the sector may face difficulty in raising money. The beauty of P2P is that it brings together different individuals to carry out lending. These lenders may have different objectives and focus, but by mobilizing a large number of lenders, P2P can in a way ensure that no industry gets left behind.

Geography focus – Lenders also take the domicile of a borrower in consideration. One of the biggest limitations of the banking system is that it is hamstrung by the need to have a physical presence across the country. Given the size of the country, this is a Herculean task and one that does not make economic sense. Lenders prefer to lend to borrowers in a particular city, state, town and for borrowers beyond that, it often becomes a problem. P2P with its seamless and pan-India operation through the Internet has been able to join borrowers and lenders from throughout the country.  When the lenders can come from the furthest corner of the country, a borrower’s ability to raise money goes up substantially.

To boost economic growth by helping MSME sector access funds, new-age financial models need to be encouraged. P2P lending is one such model that can go a long way in addressing India’s credit gap.