The Road Ahead For P2P Lending In India

P2P lending is set to fill the gaps of credit demand in the country

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The fintech sector has evolved over the previous decade from a small, nascent industry to a slew of behemoths, several of which have now become Unicorns. The sector's exponential growth drew the attention of India's Prime Minister, who declared the industry to be a revolutionary one. In December 2021, Prime Minister Narendra Modi hailed the fintech sector for its vast growth and widespread acceptance. He stressed highlighting the significance of turning fintech projects into a fintech revolution to give all citizens financial empowerment. Recently again, post the announcement of digital currency during the Budget Session, he stressed how the fintech industry would transform with its use.

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To fulfil the customers' needs, various fintech companies create innovative products daily. In a country with over one billion people, the credit demand is expanding in response to rising earnings and consumption. Currently, the total credit market size in the country stands at INR 156.9 lakh crore, with a growth of about 100 per cent from FY17 to FY21. One such sector actively catering to the rapidly growing credit demand is peer-to-peer (P2P) lending. P2P lending services serve a large segment of the population who would otherwise be unable to access credit through regular channels.

As the name implies, P2P lending allows individuals to obtain loans directly from other individuals, eliminating the commercial bank as an intermediary. P2P lending has gained immense popularity in India, benefiting both investors and borrowers. On one end, it has emerged as a flourishing asset class; on the other side, it is filling the gaps of credit demand. Investors benefit from better returns on investments, with a direct connection with the borrowers and the ability to lend regardless of location. An individual investor or a financial institution can become a lender on a P2P lending platform and receive an annual interest rate of 10-12 per cent, making it a great investment option. In the case of the borrower, he has the option of taking out a small ticket-size loan with a low interest rate and a shorter repayment period.

P2P lending has been catering to people's small-amount financial needs. There has been a surge in demand for small-ticket loans from millennials due to e-commerce sales to buy consumer durables or mobile phones and festive and wedding seasons. These positive events impacted the small-amount personal loans, but unforeseen medical emergencies were also a big reason that topped the chart during the August-September period of 2021. Small-ticket personal loans of less than INR 1 lakh in the personal loan segment contributed 50 per cent in volumes as of March 2021. We have witnessed a rise in smaller ticket loans, with more and more individuals opting between INR 5,000 and INR 25,000.

Most commercial banks cannot meet these consumers' small financial demands, that's where Reserve Bank of India (RBI) regulated P2P-NBFCs come in. It has been aggressively promoting small, short-term loans to young folks since they serve the proper purpose and have low-interest rates. Most fintech businesses that specialize in digital lending provide a wide range of perks to consumers who may easily borrow money from them. The growth of digital lending over the last five years has been spectacular compared with other enabling factors and supporting infrastructure that are still evolving. It is now time for digital lending to go full throttle, with the help and participation of all stakeholders. India had the highest fintech adoption rate of 87 per cent by 2020, according to a fintech market research report. It estimates that the Indian fintech sector would be worth $8.35 billion by 2026, up from $2.3 billion in 2020, representing a 24.56 per cent compound annual growth rate.

P2P lending, as a significant component of the larger fintech sector, is quickly becoming the most popular alternative investment option. It quickly transforms India into a credit-inclusive society while also providing investors with one of the most promising asset classes. In this regard, of all the recent fintech disruptors, P2P lending is by far the most creative. With the government's emphasis on digitization and the creation of new specific fintech departments, P2P lending platforms that improve loan availability are poised for explosive growth. Because banking operations would never bring enough capital to fill the credit gap in the Indian economy, the RBI and the central government have both been optimistic about this segment. In India, the ratio of household debt to GDP is 12.6 per cent. Among the emerging economies, China has a balance of 57.2 per cent, South Africa has 34.5 per cent, and Indonesia has 17 per cent. With the economy improving, consumption is expected to rise, propelling India to a $5-trillion economy where credit should be readily available. With its unique provision of tech-enabled solutions spanning on-boarding, underwriting and disbursement, P2P lending platforms can meet such demands. With all factors encouraging the sector, P2P lending platforms that are borderless are here to stay.