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 most underpenetrated markets for lending, with close to 70 per cent of the market being underserved by institutional lenders.
Traditionally, lending activities in India were either carried out by brick and mortar financial institutions like banks or by local money lenders, both catering to different borrower segments. Banks depended on their branch network for all of their lending. They were restricted in the scale of operation because ofhigh costs and the dependence on 'feet-on-street' to acquire borrowers. Additionally, credit assessments were largely decentralized and based on a credit officer's judgment further restricting their ability to lend to the masses.A large part of this lending was guarantor/ collateral backed, forcinga number of borrowers to take loans from private money lenders at high rates of interest.
The last decade has seen tremendous improvement in the lending infrastructure in the country. Financial institutions' ability to lend at scale has improved greatly as they now have access to centralized credit assessments using data and risk assessment solutions fromcredit bureaus like Experian and CIBIL. Also, the growing number of ecommerce websites and online marketplaces have brought a large number of users online, on mobile and desktop.The combination of these two, along with the huge untapped potential for providing credit to 2/3rds of the country, have led to the emergence of a new breed of online lending platforms in India.
After the financial crisis in 2008, financial institutions in the west - under regulatory pressure and fearing losses -restricted their lending to only the low risk segments. This led to the rise of a large number of alternative lending companies some of which, like LendingClub and OnDeck, have now become mainstays and have helped bridge the supply-demand gap to a large extent.
Eyeing this huge untapped opportunity and the success of such institutions in the west, a number of alternative lending companies have come up in India in the last 24 months.
1. Marketplace lenders: These are online platforms that enable loans to consumers through a number of financial institutions. These marketplaces enable the lenders to lend to the masses - cheaper and faster. The platform also greatly benefits from the vast operations of these financial institutions.
2. Balance sheet lenders: These are existing or new financial institutions lending to consumers and small businesses online. These institutions are able to bring cost efficiency and data enabled risk assessments to the existing system but are hugely restricted by their limited access to capital as compared to a marketplace lender.
3. Peer-to-Peerlenders: Wherein consumers lend to each other with an intermediary; this model promises to benefit borrowers but still remains unregulated in India, thereby posing risks to the lender's investment.
While such platforms have a large potential to grow in India, there are still some challenges that these companies need to consider. Increase in sale needs to be balanced with proper risk management. All of these businesses must test the waters patiently, and then use the findings from these tests to scale up. Another thing to keep in mind are regulatory challenges, especially for the peer to peer lending companies, as the regulator is bound to take strict action at some point since thecommon man's money is involved.
There's huge opportunity for online lending platforms to partner with financial institutions - synergizing the platform's technology and data analytics capabilities with financial institutions' existing operations and scale of lending, companies can build robust financial inclusion initiatives and truly expand the market to increase lending penetration in India.
