By Rajat Gandhi
The Economic Survey
2017-18 tabled in the Parliament on Monday delivered an unsurprising, but troubling figure. The amount of credit or loans disbursed by banks amounted to Rs 26,041 billion as on November 2017, but 82.6% of this was pocketed by large enterprises. For millions of SMEs
in the country, banks only lent out 17.4 % of the total credit.
The figure in the Survey is a further validation of the fact that SMEs in the country are credit starved.
While banks have come up with numerous reasons to justify the anaemic amount of lending to the sector, what is noteworthy is the fact that where banks have failed, others are moving in. RBI
data show that NBFCs have increased their lending to the SME sector by giving out about Rs 680 crore to the micro, small and medium enterprises compared to Rs. 480 crore in 2016
. These figures do not include the loans extended to SMEs by the P2P industry, which has been recently classified as an NBFC.
It is well-established that Peer to Peer lending is a brilliantly innovative form of financial assistance and is helping the government drive its vision of financial inclusion successfully. If we look at global scene, the UK government has time and again supported their P2P lending sector with favourable policies and the result is for all to see. In 2015-16 more than 10,000 businesses across UK benefitted and an estimated 30,000 new jobs were created due to UK government’s favorable policies for the P2P lending sector.
In India, the industry needs government support to boost its efforts towards furthering the cause of financial inclusion. We propose a four-pronged strategy for the same:
There has been a debate on the role banks can play within the P2P sector. It is true that the very essence of P2P is to be an alternate source of finance, it should not be a case to limit the potential of what can be achieved. This is particularly significant given the very large credit requirement the nation possesses. Banks have already collaborated in the UK where banks like RBS and Santander have used P2P platforms to lend to SMEs. Similarly, in the US JP Morgan Chase & Co. has acquired nearly $1 billion worth of personal loans arranged by LendingClub Corp.
In India, the government should get creative and the Budget should be used as a framework to integrate the traditional channels of finance with the fintech revolution. If I had to give an example, Bank credit to MFIs (NBFC-MFIs, societies, trusts etc.) extended for on-lending to individuals and also to members of SHGs / JLGs is eligible for categorisation as priority sector advance under respective categories. This included agriculture, Micro, Small and Medium Enterprises, Social Infrastructure and others subjects. Since P2P lending is now a NBFC, banks should be actively encouraged to engage with the P2P community and even categorise credit advances to P2P under a Bank’s priority sector lending targets. It makes sense to marry the advantages of P2P with the financial muscle of banks.
Secondly, the government of India can extend financial support to the sector by directly funding or co-funding SMEs and MSMEs through registered P2P lending platforms.
Case in point is the UK where one major support is to mandate the UK Government-owned British Business Bank (akin to India’s Mudra Bank), to support the P2P lending sector. The BBB invests in challenger banks, non-bank providers of finance as well as debt and venture capital funds to increase the choice of finance for small and mid-sized businesses. In 2015 the BBB began lending to UK small businesses through the P2P lending platform, Funding Circle. In Jan 2017, the BBB announced an additional funding line of £40m, following the success of its program. In India the Government of India’s Mudra Bank can follow a similar approach, by directly funding or co-funding of SMEs and MSMEs through approved P2P Lending platforms.
Thirdly, regulatory limits imposed on individual lending through P2P lending platforms are restrictive and will inhibit the growth of the sector. The RBI, in its regulatory directions of October 4, 2017, has mandated that the aggregate exposure of all lenders, and all borrowers, across all P2P platforms, shall not exceed Rs 10 lakh. The exposure of lenders and borrowers should be driven by the market, and not mandated by regulation.
Finally, and most importantly, the government can support P2P lending through its tax policies by making interest earned through P2P loans tax-free and allowing taxpayers to offset or write-off bad-debts in one P2P company against the interest earned at another P2P company. Once again, to cite the example of the UK, which has supported P2P lending through its tax policies. P2P loans qualify for ISA (Individual Savings Accounts) investments. Any UK taxpayer can invest up to £20,000 a year in P2P loans (this is the overall limit for annual ISA investments), and the interest earned will be tax-free.
It is worthy to note that there is no capital gains tax in the stock market. Unlike the secondary stock market, P2P lending is fast becoming an important wheel in the Government of India’s drive towards financial inclusion. Taking credit to those who have till now been under-banked and dependent on an unorganized sector to raise funds, P2P lending is impacting not just the economy of a country dependent on SMEs and MSMEs but the very social fabric of the country. By its very nature, online technology is accessible from any part of the country. Whereas, only approx. 15% of personal loans disbursed by banks and traditional FIs are to Tier 3/Semi-Urban areas; this ratio jumps to 25% when it comes to online lending.
The NTC or New-to-Credit, and Female Borrowers find it tough to access credit from banks and FIs. Using tech-based, alternative scoring methods which are using data points long-ignored by traditions institutes, P2P Lending is taking credit to this segment. Female borrowers find it easier to get funded by Lenders and are also timelier in their repayments.
Considering the advantages that P2P lending brings to the table, government support is not just important to further boost this sector but also critical.
The writer is founder & CEO of peer-to-peer lending marketplace, Faircent.com.