Raghavendra Pratap Singh, Abhinav Johary and Vaibhav Kumar Pandey, former colleagues at the digital content solutions firm Aptara, were aware of a popular practice in that office. Whenever people needed to raise some quick cash, they would ask their friends and colleagues for a loan instead of queuing up at the bank or knocking at the moneylenders. This informal way of getting credit set them thinking about starting a peer-to-peer (P2P) lending platform that would connect borrowers and lenders via the Internet, and would assess the creditworthiness of the borrowers and the risk appetite of investors before the matching happens.
As a business model, P2P lending is still at a nascent stage in India. According to Tracxn, there are 63 pure-play companies in this domain such as Faircent, Lendbox, Capital Float, Indifi Technologies and i-Lend. The trio, however, did a thorough market survey for six months, and two of their friends, Neha Aggarwal and Manisha Bansal, also joined the team. Together, they set up i2ifunding.com in October 2015.
Making a Mark
P2P is a simple concept, but its very nature mandates a robust system for assessing the creditworthiness of borrowers. To make that cut, i2i gathers as much information as possible about people looking for loans (yes, it looks at their social media profiles as well), collects all relevant documents and verifies them. Each profile is then automatically analysed and put under one of the three tabs - Accepted, Rejected and On border. Next, its underwriters manually go through the borderline cases and ask for more information to give them a specific status. They also list the strengths and concerns regarding each 'Accepted' borrower, taking into account factors such as incomes, liabilities and CIBIL scores. The company receives an average of 4,000 loan applications every month, out of which only 50-60 per cent people complete the entire application process and out of that, only 60-70 applications get accepted, says Singh.
The start-up has also initiated a 'One loan, One Interest' policy for every risk category. "There is no pre-defined interest rate in the P2P space and rates mostly depend on negotiation skills," he explains. In a bid to standardise that, i2i has classified all its borrowers into six categories (from A to F, where A denotes the least risk), and each category comes with a predefined interest rate in proportion to the risk involved. For instance, people under Category C (mid-risk segment) pay 17.5- 20 per cent interest on loans while Category F, the highest-risk segment, has to pay 25-36 per cent. It also means lenders can choose the interest they want to earn and the risk they are willing to undertake. The loan tenure varies between six and 24 months but can be stretched up to 36 months.
As per the start-up's policy, an investor can only lend up to 20 per cent of the loan amount required by a borrower. It means one's investment is split into tiny slivers and given to several borrowers so that even if one defaults, others will pay the investor back.
The company currently makes money from the fees paid by its registered users. While investors pay a one-time registration fee of `500, potential borrowers just need to pay `100. Additionally, an investor has to pay a service fee, which is 1 per cent of the total amount invested on the platform. Again, based on the risk profile, a borrower has to make an upfront payment of 3-6 per cent of the loan.
How Investor Trust Was Built
Awareness is still low and Pandey relates how they had a hard time initially, convincing investors/lenders that it was not a Ponzi scheme. The worst fear is that of losing money as defaulters abound. To protect retail investors, i2i has recently launched a Principal Protection scheme so that a lender will always get back a certain part of the amount invested, depending on the risk category. For instance, all lenders under Category A get 100 per cent refund, but investments under Category F, the most risk-prone level, are only guaranteed 50 per cent refund. Still, one cannot completely avoid the risk of bad loans. For i2i, such loans account for 4 per cent of the total loan disbursal or around Rs 20 lakh.
But the risk aspect does not worry the likes of Captain Deepanshu Garg, a merchant navy officer from Noida. He has been investing in the i2i platform for the past one year and has given loans to around 70 people. Out of these, only one turned out to be a bad loan, but he got his principal amount back, thanks to the company's investment protection scheme. "For the rest, I got an average 21.33 per cent interest, which is good. Lending in P2P works for me as I believe in high-risk, high-reward investments," he says.
Will Regulation Bring Depth?
Unlike the traditional ecosystem, P2P lending bets big on unsecured loans and the platforms are still new. Hence, regulations are required to iron out all major worries if the segment is to service India's fast-growing credit market in a big way and provide lenders with good returns.
"The potential of these platforms can, however, be reasonably estimated once the applicable RBI guidelines are issued," says Harshal Kamdar, Partner, Financial Services - Tax and Regulatory, PwC. "Regulating P2P lending platforms will foster confidence and build trust among the stakeholders involved," he adds. RBI has already finalised norms for P2P lending platforms and is expected to announce the final guidelines in a few weeks.
In a consultation paper released in April last year, the central bank has proposed a minimum capital requirement of `20 million and maintenance of leverage ratio to ensure that the platforms can manage business shocks and curb imprudent expansion. Another proposition was that investors should transfer the money directly to borrowers so that some poorly run or fraudulent platforms do not declare insolvency, taking the investors' funds with them. The industry, on the other hand, suggested using escrow accounts. When the RBI comes up with the final regulations, these companies may have to restructure their operations in sync with the regulator's mandates. Till then, it is wait and watch for i2i and its ilk.