In the recent years, Internet access and mobile penetration have taken financing and financial transactions to a whole different level. Over the last 12 months or so, the Fintech industry has found support from both investors and customers alike and is set on a growth trajectory. While investments across industries in 2017 grew pale in comparison with those in 2016, the Fintech industry saw a different scenario. Experts are betting heavy on the industry and in a country that has a diverse business and consumer landscape, Fintech might just be the next big wave waiting to surface.
Factors driving the Fintech industry
The demonetization initiative by the government of India triggered a huge surge in digital transactions. Inevitably, this widened the spectrum for the Fintech sector to expand. As per a report by NASSCOM and KPMG, the transaction value of the Indian Fintech sector was around $33 billion in 2016 and is estimated to grow to $73 billion by 2020 at a Compound Annual Growth Rate of 22%. The report also estimates Fintech software services industry to touch $2.4 billion by 2020 from the current $1.2 billion.
The emergence of P2P lending or alternative lending
The repealing of certain currency notes during demonetization notes led to lower deposits which resulted in banks having to halt their lending process. This left far too many SMEs, small companies, entrepreneurs, and even individuals looking for alternate avenues for credit. Consequently, Peer-to-Peer lending gained momentum.
P2P lending is the process of lending money to both individuals and businesses via online platforms that connect or match lenders to borrowers.
For decades, traditional banks have been and still are the largest financiers or lenders in the country for both individuals as well as businesses. However, the last 18-24 months have seen a gradual and consistent emergence of P2P lending. This was made possible due to a number factors, more prominent among them being a great disparity in lending in the country.
P2P lending differs from banks in two major ways. Firstly, the lending interest rates are lower than those quoted by banks, and secondly, P2P lending is largely driven via online platforms ensuring reduced operational expenditure. While banks make a profit by charging interest rates, P2P platforms do so by charging a nominal fee to both lender and borrower.
P2P changing the lending landscape
P2P lending is breaking barriers in more ways than one. Going forward, it is set to challenge the traditional lending institutions such as banks. Bad loans and higher non-performing assets have forced most banks to re-think their lending strategy and it is under these circumstances that P2P is set to play a key role. Interestingly, banks are more skewed towards lending to corporates than towards lending to individuals or SMEs. For the year 2016, 54% of the total loans went towards the corporate sector and more than 80% of these corporate borrowings were concentrated among top 200 companies. SMEs, which contribute around 45% to the national GDP hardly get any access to loans and hence are forced to rely on informal lending systems. Many informal lending systems charge between 24%-60% as interest, which could kill the profitability of SMEs and inhibit their survival.
There is a need for alternative financing or lending in the Indian market. This is the reason why P2P lending will play a major role in the coming few years.
Where is P2P lending headed?
The lending landscape is still taking shape and will undergo some major changes in the coming few months. Internet access, mobile technology and public awareness will be some strong driving factors helping P2P spread its footprint. Different forms of lending such as crowdfunding, micro-lending, social lending, short-term payday loans are finding acceptance and are steadily becoming popular.
Reports suggest that retail loans (loans to individuals) will increase 5 times over the next 10 years from $620 billion to $3020 billion by 2026-27. This will open a massive space for alternative lending and P2P will be among the front-runners. Another segment that could use the service of P2P will be the small business sector where individuals can lend to these businesses at mutually agreed, but comparatively lower interest rates.
A good number of start-ups bolstered by solid fundamentals and funds are entering the P2P or alternative lending space. The importance has been reasserted by the confidence investors have shown towards P2P lending in 2017 out of all sectors. Alternative lending gained the most traction with an infusion of $106 million, beating payments which stood second with $83 million. These statisics definitely augur well for the future of P2P lending in India.