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SMEs

Why Small Business Owners are Banking on P2P Lending

Small enterprises end up approaching the unorganized private sector lending agencies or the loan sharks who charge an exorbitantly high-interest rate and have exploitative practices, but here's the solution
Why Small Business Owners are Banking on P2P Lending
Image credit: Shutterstock
Founder & CEO, Faircent
4 min read
Opinions expressed by Entrepreneur contributors are their own.

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The internet revolution followed by the development of the sharing economy has slowly and surely changed the way we eat, communicate, live and travel. Now Fintech has come to the rescue of small business owners starved for much-needed credit. A new form of lending through crowdfunding is fast becoming a potent source for the much-beleaguered MSMEs traditionally denied loans by the organized financial sector.

 

Need for Alternate Lending

Most businesses have felt the deleterious effects (worse in a semi-urban or rural area) of the events of the past few years that have plagued the financial landscape. Organized credit is drying up thanks to the burgeoning NPAs of banks and NBFCs; the consequent slowdown in lending reaching a flashpoint because of the ILF&S crisis. Further, MSMEs have traditionally dealt in cash transactions, compounding the difficulty of securing a loan for business operations and expansion as banks consider formal financial history along with credit score from a credit bureau as an important eligibility criterion. Even personal loans become inaccessible or very expensive.

Often, such enterprises end up approaching the unorganized private sector lending agencies or the loan sharks who charge an exorbitantly high-interest rate and have exploitative practices. In such a scenario the need to find alternate sources of funding for small businesses to meet the financial needs to run day-to-day businesses arises.

 

The Advent of Alternate Sources

Since 2012, the beleaguered SME and MSME sector has seen the entry of a new form of lending. P2P Lending is a resource that invites borrowers and lenders to meet on a common digital platform to understand each other’s requirements – the need for earning an income for the lender and the need for funds at an affordable interest for the borrower.

P2P lending was able to take credit at a reasonable cost to small businesses mainly due to the following factors

  1. Low-cost operations: By integrating technology in the credit modelling process and directly connecting borrowers with lenders thereby removing intermediaries, P2P lending keeps the cost of operations low and passes this benefit to lenders in terms of higher returns and to borrowers in terms of cheaper loans.

  2. Online processes: India is a huge country and to be physically present in rural and remote areas is either impossible or comes at a very high cost for financial institutions. However, higher mobile penetration along with growth in mobile banking means that access to online lending is easier. With its simple, presence-less processes P2P lending can reach out to every Indian and MSME across India.

  3. Automated and advanced Credit Evaluation mechanism: Perhaps the biggest advantage is the advance fully-automated credit evaluation algorithm used by P2P lending platforms which have not only lowered the cost associated with lending to small-ticket customers but also enabled better use of traditional and new data sources to improve underwriting and expand credit access. Using alternative data, Platforms can evaluate even borrowers with no credit history or formal credit score from credit bureaus. P2P lending is a ray of light for this segment.

 

Trends in P2P Lending

 

In the short 6-year history of P2P Lending in India, it has shown tremendous promise in contributing to the goal of financial inclusion.

The government recognizes the critical role that P2P lending can play to fill the void of inaccessibility to financial services faced by a large population of India especially small businesses in semi-urban and rural areas. In late 2017, RBI regulated the sector, issuing master directions whereby P2P Lending was recognized as NBFC-P2P.     

 

Bright Future for MSMEs

P2P Lending companies find themselves on an exponential growth curve as these companies start tapping the huge potential that exists among MSMEs. As per the annual report of the Government of India’s Ministry of Micro, Small and Medium Enterprises, the number of MSMEs grew from 361.76 lakh to 633.88 lakh representing a CAGR of 6.43% over the period 2006-07 to 2015-16.

The huge body of MSMEs in India is receiving special attention from the governments at the centre and states and these will require funding. It is here that P2P Lending can make a difference with its nimble footed approach to lending overcoming the procedural infirmities prevalent for MSMEs in the traditional lending space.

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