At Canaan US, we have invested in a peer to peer lending company – Lending Club. The company launched itself on Facebook and in last three months, it has facilitated $1 million in loans. The value proposition is for people taking unsecured personal loans of smaller amounts (~ $5000) and also for lenders getting higher returns on their surplus money in the bank (obviously at a higher risk – question is if risk fits into lenders risk appetite)
Business Model:Money is made by brining down the cost and eliminating bank from the chain
I thought to share my viewpoint on the key enablers of this business in US and would like to know your feedback on the India opportunity
• Scope of brining down cost of providing loan using technology – In US, the spread for a bank giving unsecured personal loan is around 10%. This spread consists of cost of providing loan (assessing and tracking) and Bank’s profit margin. The numbers are similar in India. Depositors get somewhere around 4-5.5% on saving accounts and personal loan interest rates are in the range of 15-24% depending on the profile of borrower. So the spread is north of 10%
• Ability to assess the risk profile of borrowers using technology
Firstly, using Credit Reports – Unlike US, this had not been possible in India because lack of data sharing between various banks. However; with CIBIL this has changed. RBI has made mandatory for all banks to report defaulters. Recently, I took an education loan for my brother from State Bank of Bikaner and Jaipur and to my surprise they checked my loan history from CIBIL database. With time, we all will have a credit report which can be used to assess the risk profile of individuals based on past history
Secondly, using social information about an individual’s community, associations etc – LendingClub has started with borrowers from different communities e.g. Harvard Alumni, Army Communities. In India, this is something not new. MFIs have very well tried this concept (of community based lending) through Self-Help-Groups and able to lend millions of dollars to rural people. The loan amount is as small as 4000 rupees. I think this can be extended to urban, young, educated class as well. Imagine my Facebook Lending Club application (with all my professional and social nodes) shows me as a defaulter – I think I would not like that for a small amount.
We still need to do some math on the market in India. I don’t have credible numbers as of now. However; unsecured personal loan market is growing at a rate of 30% (home loan is growing at 20%) and has been source of rich profits for some of the private banks. And personal loan market is still dominated by young, educated, urban people whom I think should have internet and mobile access.
Any views on why this business can work or fail in India – Challenges, Issues, Positives?
- Onion Rs65/kg, Petrol Rs65/litre, Beer Rs65! - January 19, 2011
- NEN Program for Women Entrepreneurs - September 3, 2010
- A Billion Dollar Indian Internet Company - August 19, 2010
One system that has been doing this for a long time is the chit fund biz popular in South India. It has a co that manages the fund and takes 5% as their fee. The rate at which the chit is discounted depends on the balance period for the chit. It is based on the bidding system with a max discounting of 30%. The nett cost to a person bidding is close 8% and one who does not bid at all netts approx 15%.
Mohan
I suppose the main challenge in India is lack of legal recourse thus increasing the risk.
Would you please elaborate on the recovery mechanism envisaged in that “Lending Club” model?
Now even Banks have cut down on the size of their personal / auto loan books since rates of default are creeping up. There have been instances of recovery agents getting agressive, borrowers committing suicide and the banks having to pay 10 times the unrecovered loan as damages to the dead defaulter’s aggrieved family !!
Where even institutions fail to tread, should it be any easier for individual borrowers…?
P2P lending also denies the benefit of set off of losses from defaulters against excessive interest from obliging borrowers (as in credit cards) – since it’s not the same lender that lends to a good and a bad borrower unlike in a bank. The whole proposition to me, looks more like gambling than prudent risk assumptions.
In short, this will be a haven for wilful defaulters (after exhausing all other borrowing options). As a corollary, only loan sharks, tax dodgers and musclemen that can’t operate in offline civil society, bent on recovering by using all means available, will breed here.
Love to read arguments to the contrary and stay corrected.
Peer to Peer lending has existed in India since whenever. However, most of the p2p lending that I am aware of thrives on black money. If someone has 50000 rupees of white money to lend, why should he/she give it out for 16% returns at such risk? If the lender has risk appettite , he/she can invest in mutual funds or stocks.
The argument about losing face on facebook is theoretical at best. How many people on FB will lend out 5000 rupees? For making how much money? On the other hand, if the amount is bigger,say 50000, the upside of faking an account is greater.
How is the risk positioning different from subprime? The role of technology is also not clear besides being an aggregation tool. In India, people are more comfortable lending in a localized fashion, whether it be relatives, neighbors or even community chit funds( which is not really lending). An initiative , focused on local communities with technology’s role being limited to an accesible community database and tracking tool, should work much better.
Hi Mukul,
There is a company called Eko (eko.co.in) based out of Delhi. They work on similar lines. You should check out their website.
In my opinion there are other things also that are important in the whole lending and accepting loans systems in India.
First: Someone taking a loan in urban India is still not comfortable telling other people and accepting socially that they have taken a loan.
Second: I dont know about US but here in India people take loans for either short term business needs or lifestyle. Most of the high ticket loans (25K + are for business needs) and most of the lower ticket (>10K and <25K) loans are for lifestyle needs (TV, Ref, Bikes etc).
I agree that most personal loan customers in India are educated, urban and have internet and mobile access. The basic premise of the FB application is that if you default all your contacts and friends would know that you defaulted. Its like publishing your name in the newspaper in the most wanted column. In India, Internet is yet to gain that kind of importance.
We should also see if someone has defaulted, is it because he intended to default or is it that he genuinely was short of cash and could not repay. If someone wants to pay back and is unable to, do we still penalize him? So we still put his name in the blacklist? The classic ability to pay and willingness to pay debate.
Third: If we are talking about very small ticket personal loans (<5k), you should look at all those cooperatives, committees, chit-funds etc. You have also talked about self help groups – dont know if you are talking about the same thing. They essentially operate as a loan system. Say 12 members will pool in 1000 bucks each month for the entire year and any member can take that kitty each month once a year. No transaction costs and tons of trust. There have been incidences of defaults but mostly this system works fine. If someone can regularize this system, it would be awesome. Only catch is that there is no returns for people loaning out money.
Would want to read other people’s opinion. Please point out if there are flaws in the arguments.