P2P lending: Can India replicate the UK experience to achieve Sabka Saath, Sabka Vikas?
Several million MSMEs that lack a tangible financial record are thus not eligible for credit from legacy financial institutions who still use traditional credit and financial data to evaluate eligibility.
India is still struggling with a huge credit gap that is holding back the economy. Getting a bank loan is an extremely cumbersome and long-drawn process for salaried individuals and small businesses, alike. According to a study conducted jointly by ASSOCHAM and EY, around 19% of India's population remains unserved by the traditional banking sector.
Several million MSMEs that lack a tangible financial record are thus not eligible for credit from legacy financial institutions who still use traditional credit and financial data to evaluate eligibility. For the Indian economy to achieve the next level of growth, the current gap of nearly $200 billion in credit supply to MSMEs and significant under-banked population of India needs to be addressed immediately.
P2P lending in the country, though still nascent, has slowly and steadily become a great source of finance for businesses looking to raise money. Using tech-enabled credit evaluation mechanism that access both traditional and non-traditional data points, P2P lending is bringing a large population of un-banked Indians under the anvil of organized credit. Consider this- while only 17.4% of the total credit made available by banks have been to MSMEs in the country, almost 50% of our total lending on Faircent.com is towards business loans helping smaller businesses expand faster.
The UK Experience
The financial crisis of 2000s created a funding gap for new and growing businesses. At the same time technological advances opened up opportunities in many industries; sharing economy boomed and FinTech surfaced. P2P lending arrived in UK in 2005 with Zopa. Since then P2P lending has grown at a massive pace backed by the UK Government's direct support to the sector.
UK Government encourages P2P Lending through various steps: Collaboration with traditional finance: The UK Government now requires banks to refer rejected loans to P2P providers providing them with a favorable chance to access credit.
Direct Lending through P2P Lending platforms : Funding Circle, a P2P lending platform in UK, has received £100m from the state-owned British Business Bank (BBB is akin to India's Mudra Bank), since 2013 on the condition that the funds will be used to lend to small businesses. According to the BBB, the money has been distributed to more than 10,000 UK businesses and earned the bank around £5m in net interest. I have already mentioned after this year's Budget that the government's decision to target disbursal of Rs 3 lakh crore under the Mudra Yojana is commendable, but I hope investments also flow through registered P2P Lending platforms to directly fund or co-fund MSMEs, NTCs and women entrepreneurs - the very backbone of the Indian social and economic ecosystem.
Support through taxation policy: One of the most important developments in the regulation of P2P lending in UK happened in April 2016 when Independent financial advisers (IFAs) were permitted for the first time to recommend P2P investment to clients and, on the same date, the "innovative finance ISA" was launched, allowing P2P loans to be included in a new variant of the tax-efficient Individual Savings Accounts (ISA).
According to the scheme UK taxpayer can invest up to £20,000 a year in P2P loans (this is the overall limit for annual ISA investments), and the interest earned will be tax-free. As a result, business lending surged from £686 million in 2014 to £1.7 billion in 2016, making up 54 per cent of the market in 2016. This had a direct impact on small businesses who could now benefit from access to cheaper credit.
The above steps by the UK government have been widely seen as making P2P investment even more popular. This support to the P2P lending sector through favorable policies has meant that more than 10,000 businesses across UK benefitted and an estimated 30,000 new jobs were created due to UK government's support for the P2P lending sector.
Support from Government of India
With MSMEs in India still struggling to access cheap and easy credit, there is a strong case for the government to support P2P lending in India as it provides the best alternative to bridge the credit gap that is holding back the Indian economy.
Typically, when a P2P lender gives out loans, he splits it or distributes it across different borrowers to mitigate the potential of loss arising from a loan that cannot be recovered. This is only fair to investors, since other lenders like a bank is allowed to do so. Lending money has risks associated with it and this tax break could mean a lender does not have to categorize it as a capital loss and improve returns. Higher returns will encourage Lenders to invest more in P2P lending and increasing the volume of funds available for credit disbursement to individuals and small businesses struggling to meet their credit demands.
We have seen the appetite for risk with Indians changing in the last 10 years. While many investors continue to invest their money in P2P lending to earn great returns, many, to whom I have personally spoken, also enjoy the fact that they bring positive change in people's lives.
P2P lending companies are giving individuals with extra funds the opportunity to invest their own hard-earned money to help others to come out of credit card/debt trap, get their children married, meet sudden medical emergencies at home and help small businesses flourish. These people deserve a chance to get a tax break on bad-debts incurred from such investments. This will encourage more Lenders to come forward and invest in helping fellow Indians to access cheap and easy credit.
Last month, we became the first P2P lending platform to receive the certificate of registration as an NBFC-P2P from RBI. There was considerable excitement about what can be achieved and what regulations mean for the nascent sector. P2P lending has made positive steps, but a lot more can be accomplished. Favorable and innovative taxation policies can now provide that impetus where borrowers, lenders and the economy at large can benefit creating Sabka vikas, sabke saath.
(The writer is founder & CEO of peer-to-peer lending marketplace, Faircent.com.)