At $1.2 trillion, India is estimated to be one of the largest markets for consumer finance in the world, behind US and China. It is also one of the least evolved markets for lending, with close to 70 per cent of the market being underserved by institutional lenders. According to a report by international philanthropic investment firm Omidyar Network, over 400 million people borrowed money in India in 2014, but fewer than one in seven were approved for a formal loan.
However, 2015 ushered a pleasant change in the lending infrastructure in India. According to Tracxn, about $ 27 million was invested across alternative lending companies and there are about 30 companies across peer-to-peer (P2P) lending and SME lending verticals, with more than half established in the last 18 months.
A financial institution’s capability to lend at scale has improved tremendously as it now has access to centralised credit assessments using data and risk assessment solutions from credit bureaus like Experian and CIBIL. Furthermore, increasing penetration of smartphone users and proliferation of e-commerce websites with more and more users moving online, has enabled online lenders to tap into this population.
There are still some factors critical to fuelling the growth of the lending industry in India, especially from a government, consumer and technology standpoint.
As of today, the P2P lending industry in India is not regulated. In June 2014, the Securities and Exchange Board of India (SEBI) came out with a framework for the crowdfunding industry based on the prevailing international rules and regulations. However, the Reserve Bank of India (RBI), has not regulated peer to peer lending. This essentially means that P2P lenders in India lack access and reporting back to credit bureaus like CIBIL, which can have serious repercussions on the performance of loans issued through these platforms.
It is imperative to analyse borrower behaviour comprehensively for sound credit decision-making. A good technology platform will help overcome some of the existing challenges existing in the space by avoiding duplication of data and segmenting customers to identify the best borrowers.
Lending businesses often fail to offer payment flexibility to the borrower. This can be overcome by presenting the borrowers with a detailed payment schedule, which fully discloses the cost of the loan to them. The borrower can then choose the payment option that best fits his repayment capacity.
Cloud solutionCloud computing can play a significant role in the transformation of financial services by reinventing the business and operating models. A cloud-based lending platform helps a lending business assemble, connect, configure virtualised technology resources to meet business needs, making it possible to rapidly deploy business services at lower costs.
Marketplace lending in India is set to witness massive growth in the coming years. Capital inflows combined with technological innovation will drive better access to credit for consumers at the most favourable rates they have ever seen. This would work wonders for a credit-starved country like India.
The writer is Co-Founder and CEO, Cloud Lending Solutions