Since 2017 when RBI recognised online P2P industry as financial service segment and allowed NBFC-P2P status to 11 P2P lending platforms in India, it has given new hope to the MSME sector.
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The Credit Problem
Despite the fact the MSME’s contribution to the GDP is 30% and provides employment to 100 million of population, banks consider it risky to lend to SME. Lack of data makes it difficult for banks to assess the credit history and financial health of the concerned SME.
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This has led to a credit gap of $600 billion in India’s MSME sector (as per Omidyar Network and Boston Consulting Group’s report) with 60 million MSMEs where 40% of MSMEs are forced to turn to unorganised sources e.g. individual personal bankers/lenders at double the interest rates. Inability to get funds and funds at high cost leads to non viability of many SMEs.
P2P – A good option for SME funding needs
Online P2P lending platform is an alternative form of financing when an individual can get loan directly from another individual without the involvement of a financial institution eg banks, NBFC, etc. The P2P lending that mainly targets unbanked has great relevance in India and increasingly getting popular with Small and Medium Enterprise who don’t have much credit history to show.
One SME requirement, Multiple offers:
As an SME, you just need to place your requirement and wait. Based on your credit score, multiple lenders will get to view your requirement and auction for your need by sending you their proposals. It’s up to you to choose which proposal to accept. So, as compared to going from bank to bank, now you have many people competing to give you funds.
P2Ps offer faster credit:
P2Ps digital platforms being paperless and least human intervention are much faster. Your borrower profile goes through the credit rating procedure and background verification. Being the promoter of the SME, your profile is equally important. So, P2Ps use AI-Analytics based model to evaluate important data points about you and your company for the better assessment. As soon as your borrower profile is approved, you can have your P2P loan sanctioned and money transferred in a few hours.
P2Ps don’t require collateral:
Whereas banks require collaterals as security in order to sanction a loan, you don’t need to provide any security or collateral. All that you need is a good credit rating and your ability to repay the loan.
P2Ps are low-cost credit option:
Lenders on P2P platforms offer rates as low as 5% to 30% high depending on the credit rating of the borrowers. Also, you minus the intermediary costs, so you have cheaper credit. P2P loans are transparent without any hidden charges, fine print, no prepayment charges as well.
P2P – SME Challenges
According to the NBFC-P2P regulatory guidelines, a single lender’s combined exposure across all P2Ps cannot be more than Rs. 10 Lakh. Same way, a single borrower can max get Rs. 10 Lakh loan from all the p2p combined. Also, a single lender cannot lend more than Rs. 50.000 to a single borrower with loan maturity not to exceed 36 months.
With this kind of limitation, It is not possible for the P2P sector to derive volumes, hence hinders the sectoral growth. At the same time, it is impractical for an SME to borrow from different lenders. It will remain a challenge to help India’s SME unless Reserve Bank relaxes its P2P guideline.
SMEs due to lack of knowledge are also either not much aware of the P2P lending or don’t consider it as a credible source of funding. Many P2P operators that see MSME as an opportunity are trying to pull in more SMEs by engaging them via many awareness drives.
Way forward
P2P portals are seeing a huge opportunity in the SME sector and have the potential to support their funds requirements. Despite all odds, Faircent.com gave 64% of its total disbursement to SMEs in 2018. RupeeCircle, IndiaMoneyMart, paisadukan, LenDenClub, and CashKumarare some of the prominent players in India’s P2P sector. Whether SME also sees the same hope in P2P and RBI consider relaxing the regulation at least specifically for the SME borrowers will further help minimise the SME credit gap.