With P2P lending companies raising large venture rounds, globally, investors are finding unicorns, individuals are fulfilling their dreams and even a couple of IPOs are being launched. Peer-to-peer (P2P) lending is fast becoming one of the hottest trends in 2015. This merits the question - How did P2P lending achieve this and how sustainable is it?
How P2P lending was created?
Today, popular P2P lending platforms like Faircent.com have crossed the magic Rs 1 crore mark in terms of monthly disbursements in the month of August 2016. And this is not all. The pace continues unabated with a phenomenal growth rate of 15-20% every month since then.
But, things were not as rosy when peer-to-peer lending first made its appearance.
Post the financial crisis in 2008, banking and financial institutions started adding restrictions to their consumer lending policies. In the USA, the Consumer Protection Act and The Dodd-Frank Wall Street Reform were passed in 2010 to make credit extensions all the more stringent. There were very few ways in which cheap, quick loans could be availed without going through intense documentation and banking formalities. Even consumers with good credit scores were finding it difficult to get loans.
These inefficiencies led to the emergence of P2P lending sites. This tech-enabled, financial innovation gave borrowers a chance to avail personal loans quickly and easily. Such loans concentrated on providing traditionally denied and under-served consumers access to cheap and easy credit. More so, they promised higher returns to lenders at predictable risk.
The Future of P2P lending
Regulation
In India, regulators are consistently looking at the P2P lending market. Nevertheless, there are very few laid down regulations to make this space complicated. P2P lending forums like Faircent are monitoring their loans with proper background checks and paperwork for enhancing user experiences. For instance, on Faircent.com, over 88% of borrows are making payments regularly, with only 2.5% of borrowers having more than 6 repayments due.
Competition from banks
On the global stage, large banks like Goldman Sachs have decided to create their own lending sites and are partnering with existing lending firms. For instance, JP Morgan has partnered with OnDeck Capital to offer business loans under $250,000. Also, banks like Silicon Valley Bank, BBVA and Credit Suisse are investing in the funding rounds of different P2P lending sites. Even in this scenario, P2P lending forums like Faircent are offering opportunities to lenders to earn like banks, thus giving tough competition to established players in the banking segment.
Market size
The overall consumer credit market is HUGE. It targets verticals like home, personal, educational, auto and medical loans, along with other P2P credit provisions. At Faircent, borrowers belong to different geographical backgrounds, age groups, gender and professions. In general, with risk adjusted net returns on investments falling in a healthy 20-24 % bracket for P2P lenders, the going is just getting better, and bigger.
Impact of Demonetization
PM Narendra Modi’s recent demonetization strategy may increase demand in short to medium term for business funding mainly from SMEs. Supply is bound to increase with influx of surplus money into banks. Why keep money in a savings account at 4-5 percent, or in fixed deposits at 7-8 percent, when P2P loans have better rates to offer? With the stock market taking a dive and real estate investments set for a recessionary phase, alternate investment opportunities like P2P lending are bound to take center stage for those keen to earn month-on-month. A long term impact will be a more transparent eco-system with more efficient access to data points and hence better under-writing and evaluation of credit worth of borrowers.
The State of P2P lending in 2016
P2P borrowers are looking towards this helpful channel for seeking quick funds at comfortable rates. While bank deposits continue to provide 4-7% return, as per the recently released Research and Analysis Report by Faircent, 90% of lenders are earning a gross return of 18% to 26% p.a by creating a diversified portfolio as per their risk appetite. Also, more than 25% borrowers require fund for consolidating debt taken from other sources. This is closely followed by fund requirements for business funding and expansion. With short-term liquidity crunch expected due to demonetization, small time enterpreneurs and business owners are expected to look towards P2P lending. With both lender and borrower interest going up, P2P lending is here to stay!