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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Thank you all for contributing to this discussion.
I would agree with Ashwin; city and small town people differ in their desire to help one another. The minute we enter a city we put our guard up and are more protective of our family. However in this case the aim as I see it would be to connect honest individual of high moral standards across the geopraphic divide, small town to small.
I doubt I would have any trouble gather individuals who would lend seed money to entrepreneurs or families in order to help them begin a self-sustaining business in towns or villages of India. Many people in my community give to their church and charities but they would also be willing to invest. They would also want to see fair play and their money used properly.
At the end of the day it boils down to trust, earned trust gathered through working together. Perhaps I think to much from the heart and not analytical.
There must be some way to move money from here to good people in India who can turn this money into a long term sustainable business.
My idea would be to invest say $1000 Canadian dollars; lend it to someone and give them six months to pay it back including an additional $100. In my own situation I would be able to lend out $5000 two times a year.
Alternatively I would be open to a partial ownership in the entrepreneur business. $1000 investment now gives me a 5% share in the company long term, with 5% of the net net coming back to me annually.
I’m not account as you can see, but these are the kind of arrangements I would think feasible and workable. What do you fellows think; would this kind of approach work?
kind regards
Steve
The concept is great! How would it fair in India , this could be evaluated by a few points highlighted below
A. Primary Research Indicates – Credit history of takers is the first thing a lender evaluates before granting a loan at social lending platforms such as Prosper, Lending Club , Circlelending now bought by Virgin Money. At Kiva it’s the philanthropic drive however there are many questions raised by the lending partners towards the distribution channels
Analysis – In India there is an absence of an evaluating parameter or absolute insecurity prevails. Even if banks have access to an individual’s credit history can a lender on a network get to it? Moreover natural circle lending is established – it would be a pro v/s con evaluation for an existing lender to make the transition. Natural circle lending has a high interest rate, I am not sure but I understand that personal lending in India cannot exceed a certain interest rate legally.
B. North American Environment – community lending has been quite effective in smaller communities in North America. Personal Experience – I lived in a small town –Welland, ON, Canada, population 50 K and migrated after a year to Toronto. In welland if ur short of change for a bus someone would volunteer to pay the $ 4 for you and there is a reciprocal understanding between regular travelers. In Toronto no body cared a dam, would not even lend a $ 1 on request
Analysis – Culturally the same people in both cities an hour away from each other – one of the reasons lending is reserved in Toronto because of the high occurrence of fraud and abuse, this makes people reluctant. Sadly , the same prevails for the Indian environment, abuse over a period of time would damp this initiative and bad news spreads faster than good.
C. The US has a legal system that is effective & fast – lenders on these networks enjoy parallel rights as banks to recover their amount.
Analysis – the same does not prevail for India
D. Runaround Factor – in the case of receiving & giving money in India there is an existing runaround factor
E. Social Networking Evolution – SN and Online Community Activity is at a very nascent stage in India irrespective of what the press says & the likeness and trust of local social networks is questionable – Indians like a great product and hate the desi tag on anything to do with technology. 10 pornstar profiles on MySpace have a greater circle than the entire subscription of all home grown SN put together
Analysis – an existing Original International Network in this space would fair better here that a desi ripped off model
I closely research the SN space, the idea is great however it would take sometime to evolve in the Indian context.
P2P Lending.
If anyone comes upon such a retail lending site pleases let me know.
My investing/venture capital club here in Manitoba, Canada would be interested in providing cash loans if we can find a method that secures our investment and brings a higher ROI than our normal investment vehicles.
Steven R. Denault
steveca2@hotmail.com
A person who desperately needs money for a personal expense always uses his social circle to fulfil his needs.In India this model will not work at a large scale. The model may work at a small scale.
Peer to peer lending as a business case means it is a low interest lending within a regulated framework. Unless the policy makers have the conducive legislations and guidelines in place for such a business model, the business will be prone to very high risks.
People who firmly believe in this business model that peer to peer lending can happen at any size please pool in 1 rupee each (50 members) and give out 10 bucks to 5 needy guys.It does not work profitably at very small scale and does not work at very large scale due to high business risks and costs involved. Technology can only automate processes and there is a cost attached to it and that cost needs to be recovered if it is a business.
Fueling consumerism and materialism through such business models does not augur well for the wealth creation agenda of an individual. The word FREE does not figure anywhere in business dictionary. It is used as a bait to achieve some other ulterior business objective.
Q. Any views on why this business can work or fail in India – Challenges, Issues, Positives?
In my opinion, I think the idea is fantabulous. However, the real problem creeps in its implementation.
Challenges:
– No credit history available.
– No guarantee of repayments.
– No standardization of interest rates.
Issues:
– Tracking of details of the lender/buyer
– Credit history of persons
Positives:
– Better than banks and lending organizations in terms of interest rates
– Pool of network of people
– Easy to spread across through word of mouth