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Extending access to credit: Are alternate finance platforms creating tangible impact?

With India's online P2P lending market is expected to be worth $4-5 billion by 2023, its inclusion into a larger regulatory ambit is driving massive growth and expansion for players in the domain, as well as the overall Indian economy.
Having recently been brought under the regulatory ambit by the Reserve Bank of India (RBI), the thought was that the nascent online P2P lending sector can play a significant contribution towards furthering the cause of financial inclusion.

In its 'Consultation Paper on Peer to Peer Lending', the RBI highlighted how these web-based platforms are providing easier access of credit to small entrepreneurs by bringing prospective borrowers and lenders together. With more individuals lending to one another, interest rates for borrowers are going down, even as the increased availability of affordable credit stimulates greater financial activity and drives business growth. As a result, consumer segments such as MSMEs - until now either completely ignored or significantly underserved by the traditional banking and financial services segment - now have unparalleled access to finance and credit.

In a recent report, P2P lending platform, looks to project the economic impact it is having on the ground. Through the Social Impact Report the online platform highlights how its tech-driven approach has been empowering Indian businesses and consumers, and how improving the liquid capital available in the market is stimulating greater economic activity on a pan-India level.

A key point from the Social Impact report highlighted the fundamental difference between the credit assessment approach adopted by the online platform and other financial institutions offering unsecured loans. Most financial institutions in India at present rely on a lot of 'hard policy rules' for making credit decisions. This ends up excluding a lot of potential borrowers such as self-employed borrowers, young salaried borrowers with no bureau history, or those without tangible assets from the ambit of institutional credit. Many businesses within the MSME industry - which contributes nearly 45% to the country's overall GDP - are therefore not able to get the credit they need to scale their businesses.

The report states that there are tangible benefits when multitude of data points, such as social, financial, personal data are used by a credit assessment algorithm. Moreover, since it is not bound by a narrow interest rate band like most financial institutions, pricing the loan requirements across multiple interest rates, enabling it to accommodate a substantially higher proportion of borrowers is easier.

The completely online and paperless approach also allows borrowers across geographies, consumer demographics, and socioeconomic brackets to apply for unsecured loans without having to visit a physical branch to submit copies of their documents. Borrowers new to credit or with poor credit history, who face much difficulty in getting their loan requirements fulfilled by traditional avenues, are also able to avail hassle-free loans through the platform.

Borrowers from tier-2 and tier-3 cities comprised 20% and 17% of the total number of loans disbursed. New-to-credit borrowers comprised 35% of fulfilled borrowers on the platform, while those with poor credit ratings accounted for 10% of the overall number. Most strikingly, an analysis of credit bureau reports revealed how only 2.5% of the borrowers from tier-3 cities who received funds from the platform got any loans from other banks or financial institutions after the Faircent loan, underlining the major credit gap that the online platform is plugging within the economy.

Speaking on the report, Vinay Mathews, COO -, said in a statement, "The Indian economy has the potential to be valued at much more than the $2.3 trillion it is estimated to be currently, but most of its immense potential remains locked due to the lack of access to credit for a large section of its population. What is ironic is that this dearth is caused not because of a lack of available capital, but because of the restrictive processes that limit the seamless flow of credit."

With India's online P2P lending market is expected to be worth $4-5 billion by 2023, its inclusion into a larger regulatory ambit is driving massive growth and expansion for players in the domain, as well as the overall Indian economy.

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