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Sunday, July 12, 2020
Home ENTREPRENEURS Online Lending Industry

Online Lending Industry

India is considered to be one of the largest market for the consumer finance in the world , behind only to the US and China. It is also one of the most underpenetrated markets for lending, with close to 70 percent of the market being served by institutional lenders. Traditionally lending activity in India was either carried out by brick and mortar financial institutions like banks or by local money lenders, both catering to different borrower segments. Banks depends on their branch network for all of their lending. They were restricted in the scale of operation because of high costs and the dependence on feet on street to acquire borrowers. Huge portion of lending backed by guarantor, collateral. So many of borrowers diverted their borrowings from Banks/NBFSs to either microfinance or private lenders. Off late, Microfinance institutions have emerged to serve unnerved group of people with no security and collateral but with a high interest rates. This covered and served Self Help Group, Joint Liability Group in the remote area where people require daily cash flow to run the business.

Emergence and evolution of Fintech companies changed how the whole mechanism of lending and borrowing from banks/FIs and other lending institutions works. Financial technology transforms the process for lending and minimizes the cost, time and process to disburse the amount to the borrower. Off late, many online lending companies started this activity with various lending models such as Business Loans, Students Loans, Purchase Lending, Personal Loans, Peer-to-Peer Lending, Pay Day Loans and many more. Online Lending is a unique concept emerged due to lack of focus and ability by Banks/ FIs to serve the small businesses and individuals with various reasons like CIBIL score, stringent regulations and processes, unaffordable interest rates, need for collateral and securities against credit, small tenures etc.

Many start-ups jumped into this sector to tap the underserved credit market. Business loans through Online lending and peer-to-peer lending has gained a lot of traction in the market because of its ability to provide loans in less time with no security, affordable interest rates and various other terms which are not offered by private sector Banks, PSU banks and NBFC’s.

Online lending theme becomes favorable amongst PE/VC and other HNI category of investors. Many investments have been made into this sector. Capital float raised US $ 45 Mn, Neogrowth raised US $ 43.62 Mn, Lendingkart raised US $ 42 Mn etc. These investments have been mainly utilized in development of infrastructure & Services and advancement of technology to make the process more economical and quicker.

Pros & Cons of Online Lending Industry

Despite the commendable contribution to the nation’s economy, the SME (Small and Medium Enterprise) Sector had long been neglected by government departments, corporate, as well as banks and other financial institutions. The biggest hurdle that small businesses face in their day-to-day operations is shortage of funds and immediate requirements to keep the short term working capital cycle running. Off late, the government has been proactive in injecting various types of financial aid to small businesses. Many of the government initiatives aided this sector from its grass roots such as Micro finance, license of Small Bank Finance, Payment Banks, vision of financial Inclusion by 2021 etc. 

Although government has put lot of efforts to channel funds to the small and vulnerable businesses in the country, there is still a vacuum left by traditional banks when it comes to extending easy credit. These loans are subject to cumbersome process, unaffordable interest rates, need for collateral and securities against credit, small tenures etc. making it anything but ‘easy’ for those in need of funds. Traditional banks have not been able to fully meet customer needs which have led to the rise of micro financing start ups in the country. Financial technology businesses have targeted the segments ignore by traditional banks so far. Considering facts of online industry following are the benefits and risk involved for lenders in P2P lending.

Benefits:

1) High Risk adjusted returns

2) Asset class with returns more stable compare to Stock Market

3) Steady Cash Flow

4) Hassle Free Process

5) Paper less work

6) In Process regulatory framework

Risks:

1) High Interest Rate for borrowers

2) Default risk and creditworthiness of the borrower over time

3) Concentration Risk

4) Risk of recovery

3) Credit Policy Risk

4) No Insurance Risk

5) Macro Risk

6) Liquidity Risk

7) Foreclosure early repayment risk

P2P lending is one of the most revolutionary and disruptive financial innovations of our times. Modern technology, lifestyle, and the way we earn, spend, and invest are the lifeline of P2P lending. It provides many left behind a chance towards financial inclusion. With borrowers well rated and mostly paying on time, with the promise of decent returns and the simplicity of asset class, with a conducive regulatory framework, and greater data-transparency in the system, P2P lending may become one of the most profitable investment classes in coming years.

Traditional Bank Lending vs. Online Lending

 

Traditional Banks

Online Lending

 

Pros:

Costs less via better interest rates

Simpler process

Industry is heavy-regulated, providing more peace of mind (Comparatively)

Convenient-can be done anywhere with internet access

Bigger the business, better the rate

More accessible if personal credit is flawed/imperfect

Breadth of business lines means better terms on add-on services

Funding cycles can be more

 

Cons:

Tedious process

Higher interest rates (in some cases,much higher)

Response time can take weeks or even months

Industry not as regulated – predatory brokers and lenders do exist

Requires good personal credit

No physical branches to speak to someone in person

May require collateral

 

Less innovative solutions

 

Due to the absolute transparency provided by online loans, customers can compare the services of various banks easily. The market has evolved over the years, with metropolitan cities such as Delhi/NCR, Mumbai, Chennai, Pune and Bangalore driving growth in the market. However, low awareness with respect to online loans continues to deter consumers from using online loans.

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Ankit Gandhihttp://vyapaarJagat.com
Hello, This is Ankit Gandhi, MBA Finance. Working in Nrups Consultants LLP since last 5 years as a Sr. Associate. Nrups is family office and Investment Banking boutique firm based out of Ahmedabad. We here are managing wealth of UHNI and other family offices in processed manner. We also engaged with many corporates in Corporate Value Enhancement which is continuous process rather than single advisory. We have cumulative experience of 150 years. I was also associated with CRISIL and worked for short period of time as an Analyst. My interest mainly in to finance and also in Education, Environment. I have explored some books to read.

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