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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Hello
In the current scenario, micro finance is emerging as an exclusive business venture and many NGO/MFIs are involved in this intervention by adding hidden cost on their loan products for financial sustainability. The interest rate charged by NGO/MFIs ranges between 48 to 60% and hence rural customers are having financial burdens. Also NGO/MFIs mobilize group savings as cheap funds and rotate savings at the rate of 48 to 60% as loan funds within the group members and pay 6 – 8% interest income.
After the liquidity crisis, the prime lending rate of banks is on the increasing trend and hence 16% interest is being charged on the rural customers by nationalized banks. Regarding term loans, banks are considering very few credible NGO/MFIs (with strong asset base) as partners and hence medium and small NGOs/MFIs who have initiated micro finance interventions are having problems in sourcing loan funds. In the present scenario, as per RBI norms, 40% loan portfolio should be disbursed for priority sector lending like agriculture and to weaker sections. Hence banks are focusing on portfolio buy out rather than term loans. Due to liquidity crisis, loans for small enterprise and priority sector is facing constraints and this in-turn will affect the GDP at National level.
I feel your point will work out depending on the person in contact. We at CES (a registered NGO) is working on this model by availing loan at 2 to 3% interest rate so that it can be lend through credible NGOs thereby developing institutions and also addressing the double bottom line of vulnerable communities. In India priority should be given for agriculture sector.
Great discussion ! I am already in the process of coding a mixture of zopa,prosper.lending tree and virgin money clone site and opting a suitable business model for India followed by US and china.I would really suggest if anyone can throw some more light on a suitable India model and required licenses or permission from government authorities.
Mentors are welcome.
Subh
email:subh10@gmail.com
We are practising p2p lending in China with our site: http://www.ppdai.com. I believe there are something in common between china & india. The mode will be different from Developer countries but still feasible in some way.
Steve sent u a mail at the id provided , mail bounced back
u can send me mail at ashwinn [underscore] b [at] hotmail [dot] com
best
Interesting thought Steve, there are few sites out there working on this model but do not have a presence in India
This model can work in India if a group of Mentors validates the credentials of a low income entrepreneur borrower. Secondly access to the Internet of low income entrepreneurs in India is an issue. Background checks & validation are important else things would go out of control
This could very much work on a collaborative mode