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?
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Dear Mukul,
Lending money from friends is quite common but giving it a well structured format is something that I learned after reading your piece.
For quite some time I had been planning to make a purchase but was not eligible for a personal loan as I have been in job for only six months. Also I did not want to pay through credit card loans as they charge a hefty 18 per cent interest.
Taking a loan from anyone from my social circle was an option, and I had asked my parents to lend me on a interest rate.
I think it would be really nice if similar system could be brought up for India where people could lend or borrow from their social circle, not necessarily from social networking sites.
And Mukul I would like to ask a question as a curious journalist:
Are you people planning to bring this concept to India?
If possible please let me know about it through mail.
Regards
Great discussion. Would love to hear more about developments in India.
Since India is a huge developing market anybody gaining first mover advantage might grow fast.
Check out the blog for global p2p lending development (no articles on India yet):
http://www.p2p-banking.com
Claus
Hi ,
I had blogged about this sometime back, pl check it out and let me know what you think of it –
http://business-samhita.blogspot.com/2007/07/are-indian-chit-funds-equivalent-of-p2p.html
Most of what Krish, Bipin and Saurabh have said is correct. Small Ticket Personal Loan (STPL) is a business going through bad times.
When most retail finance companies got into this business it was with an idea of making up for expected delinquencies through the large spreads on these loans. The customers proved to be smarter. A specific trend emerging these days is that of a borrower applying simultaneously for multiple loans. It does not reflect in the history of the customer in CIBIL. Once the loan is disbursed, it gets into the cycle of defaults, collections agents, etc. etc.
This has reached an extent where some major players are either going slow or are shutting down STPL operations (i.e. loans till 40-50k).
The action is shifting to PL Plus that is 40-50k to 150- 200 k. Lets see what happens there. The profile of borrower will change and so will the nature of problems. This is a segment that will have more relevance to the P2P disucssion. It would be interesting to know what is happening in this domain.
STPL does not have any direct relevance but may have a few lessons for the P2P model. Such as:
a) defaults increase when far too many lenders are falling over each other to give loans to the same customer.
b) channels such as dsa’s etc. play a big role in customer ‘education’.
c) till some time back when the number of players in this market was limited the situation was not so bad.
I would also not agree with Krish when he says that this may be the refuge of the loan shark or the muscleman. Just as we can control the borrower it may be possible to control the lender and weed out the undesirable profiles from both ends.
In India due to the legal and social issues (enumerated in previous comments) the system will have to be modified greatly to be workable.
Couple of inputs I left in the original post
1.) I think the amount has to be in the range 30,000 – 50,000. At 5000/- business wd not make sense
2.) From the lenders side – Peer to Peer lending is a way to diversify their existing portfolio. It cannot be their primary investment but an alternative route to invest.
3.) Role of technology – for sure is to bridge the information gap. Technology will also play a crucial role in assessing the risk profile of borrower (using credit bureaus and profile)
4.) Krish – In case of lending club – company faciliate the transfer of money both side. I think they hv also done partnerships with some telephone agencies who work as reminders to borrowers
Peer to Peer Lending is a nascent business even in US. So can’t claim it as a proven business model but love to hear thoughts on how this business is different from MFIs from the borrower side as far as risk is considered
-Mukul