P2P loans: Can India reproduce the British experience to make Sabka Saath, Sabka Vikas?

By Rajat Gandhi

India is still struggling with a huge credit deficit which is dragging the economy down. Obtaining a bank loan is an extremely cumbersome and time-consuming process for individuals and small businesses alike. According to a study conducted jointly by ASSOCHAM and EY, around 19% of the Indian population is still not served by the traditional banking sector.

Several million MSMEs who do not have a tangible financial record are therefore not eligible for credit from traditional financial institutions which still use traditional credit and financial data to assess eligibility. For the Indian economy to reach the next level of growth, India’s current shortfall of nearly $ 200 billion in credit supply to MSMEs and a large underbanked population in India must be addressed immediately.

P2P loans in the country, although still nascent, have slowly and steadily become an excellent source of finance for companies seeking to raise funds. Using a technology-based credit scoring mechanism that accesses both traditional and non-traditional data points, P2P loans place a large population of unbanked Indians under the anvil of organized credit. Consider this – while only 17.4% of the total credit made available by banks went to MSMEs nationwide, almost 50% of our total loans on Faircent.com are for business loans helping small businesses. to grow faster.

The British experience

The financial crisis of the 2000s created a funding gap for new and growing businesses. At the same time, technological advancements have opened up opportunities in many industries; the sharing economy has exploded and FinTechs have surfaced. The P2P loan came to the UK in 2005 with Zopa. Since then, P2P lending has grown at a breakneck pace, supported by direct UK government support to the sector.

The UK government encourages P2P loans through different stages: Collaboration with traditional finance: The UK government now requires banks to refer refused loans to P2P providers, giving them a favorable chance to access credit.

Direct loan via P2P lending platforms
: Funding Circle, a UK P2P lending platform, has received £ 100million from the British Business Bank (BBB is akin to India’s Mudra Bank) since 2013 on condition that the funds are used to lend to individuals. small enterprises. According to the BBB, the money was distributed to over 10,000 UK businesses and earned the bank around £ 5million in net interest. I have already mentioned after this year’s budget that the government’s decision to target the disbursement of Rs 3 lakh crore under the Mudra Yojana is laudable, but I hope that the investments will also go through the registered P2P lending platforms. to directly finance or co-finance MSMEs, NTCs and women. entrepreneurs – the backbone of the Indian social and economic ecosystem.

Support through tax policy: One of the most significant developments in the regulation of P2P lending in the UK occurred in April 2016, when Independent Financial Advisors (IFAs) were first allowed to recommend P2P investments to clients and, on the same date, the “innovative finance ISA” was launched, allowing P2P loans to be included in a new variant of tax-advantaged Individual Savings Accounts (ISA).

According to the scheme, the UK taxpayer can invest up to £ 20,000 per year in P2P loans (this is the overall limit for annual ISA investments), and the interest earned will be tax exempt. As a result, business loans increased from £ 686m in 2014 to £ 1.7bn in 2016, accounting for 54% of the market in 2016. This had a direct impact on small businesses who could now benefit access to cheaper credit.

The above UK government measures have been widely seen as making P2P investing even more popular. This support to the P2P lending industry through enabling policies has enabled over 10,000 businesses across the UK to benefit and around 30,000 new jobs have been created thanks to UK government support to the lending industry. P2P.

Indian government support

With Indian MSMEs still struggling to access cheap and easy credit, the government has good reason to support P2P loans in India as they are the best alternative to fill the credit gap that is slowing the Indian economy.

Typically, when a P2P lender makes loans, they divide or distribute them among different borrowers in order to mitigate the potential for loss resulting from a loan that cannot be recovered. This is only fair for investors, as other lenders like a bank are allowed to do this. Lending money comes with risk and this tax break could mean that a lender doesn’t have to classify it as a loss of capital and improve returns. Higher yields will encourage lenders to invest more in P2P loans and increase the volume of funds available for disbursing credit to individuals and small businesses struggling to meet their credit demands.

We have seen Indians’ appetite for risk change over the past 10 years. While many investors continue to invest their money in P2P loans for great returns, many, who I have personally spoken to, also appreciate that they are making a positive change in people’s lives.

P2P loan companies offer people with extra funds the opportunity to invest their own hard-earned money to help others get out of the credit card / debt trap, marry their children, deal with sudden medical emergencies at home and helping small businesses thrive. These people deserve a chance to get tax relief on bad debts resulting from such investments. This will encourage more lenders to come forward and invest to help Indian compatriots access cheap and easy credit.

Last month, we became the first P2P lending platform to receive the certificate of registration as NBFC-P2P from RBI. There was considerable enthusiasm for what can be achieved and what regulation means for the emerging industry. P2P lending has made positive strides, but much more can be accomplished. Supportive and innovative tax policies can now provide that impetus that borrowers, lenders and the economy as a whole can benefit by creating Sabka vikas, sabke saath.

(The writer is the founder and CEO of the peer-to-peer lending market, Faircent.com.)

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