The world usually talks high of leaders and pioneers, but what about the followers. To be honest, what they lose in terms of first mover advantage is more than compensated for with the opportunity to learn from other's mistakes. Something similar is happening right now in the Indian Peer-to-Peer (P2P) lending market. While the world saw its first P2P lender 'Zopa' in the UK in 2005, India rose to the concept in 2014.This however, doesn't mean that India is losing out on the opportunity. In fact,the Indian industry is poised for stupendous growth after having analysed the reasons for companies going bust or booming in other parts of the world.
To put things into perspective, let's look at how the social lending market evolved in in China after the launch of ppdai.com in 2007, its first P2P lending platform. By the end of 2012, the average monthly loan volume was around $100M, the lenders relied on credit reports so the volume was low while the borrowers were able to dodge the systems and borrow from multiple lenders at the same time and thus defaults were very high.The next couple of years saw improvements in technology and entry of regional offline lenders who brought a better understanding of risks and operations of private lending. Since risks were controlled, by the end of 2012, the monthly loan volume reached around $500M. The period after that saw an unprecedented boom and the government too reacted sharply to provide a regulatory cushion. There are currently more than 2,000 P2P lenders in China. The monthly loan volume is clocking new highs every month and was reported at over $18.9B for October 2015.
If we look closely, all the major events that lead to a massive growth of P2P lending in China over a period of 8 years, are happening simultaneously in India.
We have a business friendly government constantly pushing for internet penetration and financial inclusion.At the macro-economic level, we are constantly clocking the highest GDP growth rate, with the constantly rising standard of living and a bursting consumer market as seen from the tremendous rise of e-commerce players. The country is home to the best technological mindswhich is now being channeled to solve complex problems in an innovative way. For example, Lendbox one of the major P2P lenders, uses big data to analyzethe credit worthiness of the borrowers. As a result, the CIBIL score is now just one criteria out of 120 which brings millions of people who have been denied credit previously under its ambit.
Even at the regulatory front, last year saw banking licenses being provided to new payment banks and small banks by RBI. Since the regulator has already announced to launch a discussion paper on p2P lending while SEBI has already released one, an initial draft for regulating the same is quite probable by the end of 2016. This will attract serious investors and also provide the much needed safety net.
The biggest factor however, is the huge opportunity. With more than 50% of the population with no access to formal funding, the country has largely been reliant on borrowing from friends and family, community, or the private money lenders. P2P platforms provide the same facility with the help of technology thus enabling a much wider network of borrowers and lenders, and a win-win situation as the lenders earn more than the average return on an FD or a bond while the borrowers get much lesser rates as compared to the private money lenders.
Having recently crossed China as the fastest growing economy of the world, India is currently sitting at the edge of a remarkable growth story and 2016 might just be the year for P2P lending.