India has a lot of informal lending within families, friends, businesses as well as semi-organized in the form of “Chit-Funds”. Peer-to-Peer lending done online to complete strangers is at the same stage as e-commerce was in year 2000.
While India is much more digital in terms of devices, it is experiencing triple digit growth in e-commerce, a young demographic and pro-active regulators.
Whether its India media, FinTech conferences, angel investors, VC firms or P2P Lending companies themselves – everyone is excited about the opportunity India holds as Peer-to-Peer Lending Market.
These 5 imperatives (in no particular order) will help in adoption of P2P lending in India:
1. From Consultation to Guidelines:
Mr. Rajan, ex-Governor of RBI and his team must be applauded for their pro-active approach to craft a consultation paper with clear articulation upcoming guidelines. This is much required in India with a myriad of laws at national and state level that are open to interpretation.
This proactive step on Peer-to-Peer lending is a much better approach than what happened to Micro-Lending Industry in 2009-10 when the regulators were caught off-guard . After the closure of consultation on Peer-to-Peer lending in May ’16, the whole industry is waiting for the guidelines.
2. Anonymity of Borrowers and Lenders:
Currently, when a person or a company is borrowing from a bank it is a transaction known to them and few others in the eco-system.
The global Peer-to-Peer lending marketplaces have adopted “anonymity” in its business model. Lenders make their decision based on key parameters of borrowers without knowing the borrower’s name.
In India, few platforms are revealing borrower identity in their website along with their race and religion as part of their risk evaluation.
At Monexo, (www.monexo.co) we believe about protection of both borrowers and lenders. We believe that sharing the details of the borrowers with all the lenders creates biases as well as compromises the position of the borrower in the market. We have created a veil of anonymity in our process to protect both of them.
3. Making Peer-to-Peer Lending interest earning – Income Tax free:
Recently, the government has published that MSMEs have a credit gap of Rs. 15 lakh crores . With the GOI initiative for “Make in India” – these gaps will increase as traditional lenders (banks, NBFCs) have stayed away from lending to MSMEs without collateral.
Peer-to-Peer lending platforms can serve the MSMEs by creating large pool of individual and institutional lenders with its technology and ability to allow diversification of risk by lenders.
This will require an incentive – similar to what we have seen in the past for insurance, mutual fund investments as well as donations.
Today, all interest income is taxed in the hands of the individuals. It will be a great incentive and allow for rapid adoption if along with the RBI guidelines, we can have Income Tax Department looking at making income from P2P lending tax free in the hands of the individuals.
This will go a long way to move the individual investors towards adopting a new asset class and drive the economy with funding of MSMEs.
TDS deduction by non-individual on interest payment:
Currently businesses are required to deduct Tax at Source for interest payment to allow them to claim the interest paid as an expense for tax calculations.
If the Tax Department is unable to accommodate the above incentive for Peer-to-Peer Lenders, then it should consider that the Peer-to-Peer lending transactions are anonymous transactions for lenders and borrowers. The identity of borrowers and lenders are only available to the Peer-to-Peer Lending platform.
I would sincerely urge the Income Tax Department to allow the borrower to issue the TDS Certificate in the name of the P2P lending Platform and then in turn P2P lending platform to the various lenders.
4. Mandatory to report loans to all the Credit Bureaus:
The above points were more about how to incentivize the lenders to consider Peer-to-Peer lending as an alternate investment in their portfolio. However, we need to ensure that the model is sustainable and the borrowers do not feel that Peer-to-Peer lending is easy money and not to be returned. Beyond this it is a critical risk management for the industry to know overall exposure to an individual or business while making new loans.
Thus, the current Bureaus should accept Peer-to-Peer lending platforms as their members and enable them to report loans made as well as the performance of these loans.
This will act as a good risk management practice for the whole financial service industry including current players i.e. Banks and NBFC’s.
5. Coming together of Peer-to-Peer Lending platforms for minimum standards beyond guideline:
Peer-to-Peer lending is a young industry and will evolve over time. Peer-to-Peer lending platforms will compete among themselves as well as current financial service providers for share of wallet of customers. The competition is good for the industry and the customer, as this will help building a stronger industry and best customer service.
It is also important to co-operate and set high standards among the platforms. Regulators are being pro-active in putting together the initial guidelines however as founders / managers, we will face issues on regular basis which may not be envisaged. How do we quickly table them and put collective thinking for the betterment of the industry – will help build confidence of the regulators as well as the customer.
As they say, one bad egg can spoil the whole bunch. We, as industry pioneers, have an onerous task of being pro-active in informing each other of our experiences and working together to build a scalable and sustainable P2P lending marketplace.
Will P2P Lending be adopted similar to Chinese consumers and become US$ 160 billion market in next 5 years – it is a million dollar question?
Author: Mukesh Bubna, Founder of Monexo Fintech Pvt. Limited (www.monexo.co/in). Mukesh is an ex-Citibanker and has launched Peer-to-Peer lending in India after a successful launch in Hong Kong.