Couple of days back; I posted about P2P lending and its India Feasibility – got mixed reponse from readers. I thought to bounce some more facts/findings from Deutsche Bank Research Report.
Interesting to note:
1.) Less default rate for borrowers who are member of some group (remember SHG of Indian MFI industry)
2.) At present; lenders choosing only low risk borrowers with credit rating AA. High risk borrowers still untapped
3.) Competition among P2P platforms has resulted in lazor thin margins for low risk borrowers.
So mix reactions. Check out some of the companies and their distributed amount. Would love to hear futher thoughts on the report.
Regards
Mukul
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Mohit – In all developed markets – where some action is happening on P2P lending – lenders are chossing AA+ borrowers (and most of the times it’s getting reflected from the credit report). This has resulted into cut throught competition across P2P platforms and as u hv mentioned market size is pretty small – Not worth a business to do
Now lets see Vikas’s point and I take India as example:
If a public bank giving me a private loan at 15% than this business might not make sense. However; in India there is no way to identify a AAA user (there is no credit report as of now and profile is an indication). My hypothesis is that public banks will only capture a very small market of Unsecured Personal Loan (Note: unsecured, public banks are very averse of unsecured loans to individuals). They’ll tell you on phone but try taking a loan. I tried once miserably failed.
Now, if i am pitching against private banks (24%-25%) – low hanging fruit in India is to identify low risk users. And I wd like to bounce if technology can be used to do this. profile and behaviour of the user can be a part of this complex equation.
There is a cool spread of 300-700 basis points even if lenders lend at FD + 200basis and borrower gets a rate of say 20%
Having said that; the real market is to tap the high risk borrowers not tapped by banks. And the assumption is public banks can’t give unsecured loans at 15% – I recently took an education loan for my brother from public bank at 13.75% with personal gurantee of repaying it. Additionally bank also took a collateral of property worth 60-70lakhs.
_mukul
I am a little confused Vikas. If the lender requires at least 150 bps over the 10% FD rate – that is roughly 11.5% that he is willing to lend at (where you are assuming – roughly – that his marginal cost = marginal benefit) … this would still work out for the borrower because public sector banks give a borrower 15% (not adding in the cost of time)…
Excellent Vikas…Exactly the same thoughts that came to my mind after gathering those figures…
Hi Mukul,
Interesting report.
I checked out rates of borrowing for a salaried customer working in a Bank, IT Company, etc. with 8-9 years of work experience (almost AAA/AA+ rating). At a INR 100,000 loan the rate offered by NBFC’s was 28-32% p.a. on reducing balance (rule of thumb – for a three year loan reducing works out to twice the fixed rate). Large private sector banks at about 24-25% and public sector banks at a surprising 15% (but with a long processing time).
These figures may not be exact but are indicative. I got them after a few phone calls. Please correct me if I am wrong.
Banks are able to offer cheaper rates because their basket of funds time deposits or FD’s at rates up to 9.5~10% are the most expensive and Current Accounts at 0% the cheapest.
The import of this is that when I as a potential lender will enter the market through P2P, what will I calculate my cost of funds to be and at what rate would I want to lend?
The maximum fixed return I get on a fairly liquid deposit is not more than 10% (in an FD). I would always want my lending rate to be 100-150 basis points higher than this – at least. This pitches me directly with private sector banks. There is no way I can beat the public sector banks.
The conclusion is that I the borrower would not prefer to borrow from myself on a P2P site. I would prefer the anonymity and speed of a Bank.
The borrowers with poorer rating are where the action is going to be. But then who in the Indian context is this borrower (profile?) and is he/she online in sufficient numbers?
Hi Mukul,
I had access to a report from world’s top internet research company( dont ask me how! ) . I think one of them has distributed $100 million in loans since inception in 2001. Most of them charge around 1-1.5 % so that turns out to be $1.5MM only. Aint it too less a revenue? Am i missing something?