The genius of p2p lending is taking advantage of a market of good quality borrowers that banks and other finance companies are avoiding, for whatever reason.
And that model has been successful in Western/advanced economies like the US and the UK as well as China and the European Union. The model has shown it works in areas with very advanced mature banking industries by filling in gaps in credit availability.
What about an emerging market economy where banks have even less reach and impact than in the West?
It should be a no brainer to set up p2p lending platforms in emerging markets where the gaps in the marketplace are so big and not being filled by banks there. Yet there are many reasons why these emerging markets are struggling to get lending platforms online. It could be local bureaucracy or government’s attitude to p2p lenders or lack of good information to gather on borrowers, or something else entirely.
Some emerging markets are starting to see new platforms launched.
One country that is starting to get it together to get peer lending platforms online is India. The RBI (India’s Central Bank called the Reserve Bank of India) has suggested that p2p lenders should be regulated as non-bank financial companies. This gives great clarity and guidance to how platforms can operate in their market and stay compliant. Kudos to them.
A followup consultation paper from the RBI stated that the "importance of these methods of financing needs to be acknowledged. If properly regulated, the P2P lending platforms can do this more effectively,” says the RBI consultation paper. The RBI further states that "P2P lending promotes alternative forms of finance, where formal finance is unable to reach and also has the potential to soften the lending rates as a result of lower operational costs and enhanced competition with the traditional lending channels. Therefore, It goes on to add that regulations at this stage would also prevent any unwanted surprises, something that became evident in the Chinese market."
Reasonable regulations and expectations of what regulations need to be followed are welcome for the whole industry and India is out in front on this in a way China and some other countries have been lagging.
“If the sector is left unregulated altogether, there is the risk of unhealthy practices being adopted by one or more players, which may have deleterious consequences,” says the RBI.
Around 10 platforms are online now in India, all less than 2 years old so this is a new market. One is emerging as the most advanced in the market.
Meet the Prosper.com of India: i2iFunding
Many Indian platforms use the auction technique to determine the interest rate a borrower pays. Many platforms including the Bitcoin lending platforms started that way before moving to fixed rates. And fixed rates are better.
Scoring systems are needed in order to have fixed rates. Otherwise, how do you tell an A grade loan from a C grade loan?
The India platform with the most advanced credit scoring and proprietary grading system is i2ifunding. i2i uses 40 different credit parameters from CIBIL score (India’s version of FICO) to income, employment stability, social media profiles and more to score and grade their loans.
Both online and physical verification of locations of borrowers and borrower information is a top priority here. These verifications are required before funds are released to borrowers.
Rates start at 12% for A grade and go up to 36% for F grade loans.
I2i also offers some principal protection. The company takes some funds and places them into a loss reserve and uses this reserve to protect principal on defaulted loans. This is an innovative form of self insurance. The amount of principal protection varies with the credit grade of the loan with 50% for F grade (the lowest grade) loans up to 100% for A grade loans.
And completely brand new. I haven't seen anything like this on a platform so far...
While i2i does the servicing of the loans, they only charge 2 fees. The primary fee is the origination fee like almost all p2p lending platforms charge at the closing of the loan. They also charge a 1% fee on added investments for lenders when additional funds are added to their online wallets to help offset the cost of the bank transfers.
An interesting twist on origination fees is that there are 2 fee structures: one for salaried borrowers and one for self- employed borrowers.
i2iFunding has a really great concept going on.
There's more to come on what i2iFunding brings to the Indian peer to peer lending marketplace and India's market in an upcoming post.......