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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The peer 2 peer lending concept is an amazing proposition foraa developing and highly consumeristic country like INDIA. This would, as rightly put across by Shekhar need “Indianization” but nevetheless a very novel idea indeed.
It would not only equip the growing young Urban populus a means to meeet their “Petty” cash requirments but also save them from “Credit Card Debt Traps” a phenomenon in rise in India.
It would be a tough task to get to the Bottomm of the Pyramid- Rural India, owing to a very moderate computer illeracy & internet penetration in India.Probably models like ITS’s “E- Chuopal” could be the answer.
Wishing Shekar the very best for his venture.If required I am ready to render my services for the same.
Cheers!
Bharath
good idea but may not work in india at present because of the non existent credit data of individuals and the regulatory problems.
Hi,
My spouse medha parthasarathy is the promoter of my-lending.com. I have been funding her efforts.our efforts to get the bank to provide gateway for funds and shares has not been successful. Our model is secured lending and many vc and angel feel that people might not lend money to unknown person.
This is inspite of the model having a full security for the loans. Pledge marked with depository is protected by depository act.
Further they have the fear on the front of stamp duty on pledges, money lender account.
Further india does not have organized credit rating for individual, hence would not know how the unsecured lending would work in india [ http://www.prosper.com and http://www.zopa.com ]
just ran into this discussion by accident – definitely an interesting discussion. it just happens so that i am in the process of launching a p2p lending business in india. we are half way through the process and are scheduled to launch just before new year. i agree with most people that there are enormous challenges in the model and the one we are going to launch is rudimentary at best compared to someone like prosper. we have tried to break it down to the indian context as much as we can – will keep you guys posted as we are closer. in the meantime could use some suggestions on the right name for the website – available domain name?
cheers guys.
its a huge opportunity in retail lending if it can be well organized. It needs an Ebay type of rating platform plus a PayPal type system to cover the logistics of the money transfer. On the legal side the Indian Arbitration Act needs to be brought in to expedite issues.
However, rather than retail peer to peer, why not look at corporate peer to peer?