Is it time for the next big investment in the P2P lending industry?
Peer-to-Peer (P2P) lending, a booming sector in the Indian fintech landscape, has been in the country for seven to eight years. These platforms offer unsecured loans and higher interest rates to borrowers compared to banks and NBFCs.
However, it was the RBI’s general management in 2017, which has brought the P2P lending segment under regulatory control. He made several changes and gave P2P lending platforms the license to operate as NBFC P2P (non-bank financial corporations).
The 2017 regulation made two major changes – First, it separated the wheat from the chaff, leaving a a handful of strong players to operate in the system. Second, it set the tone for P2P lenders to strengthen their economic models and develop, catching the eyes of institutional investors.
Between 2018-19, almost every P2P lending startup in the country raised seed and Series A funds and hit the road. However, since then not a single penny has been collected in the area. Can we conclude that there is a lack of interest from institutional investors due to the presumed low potential of the sector, or a gestation period for P2P lending startups?
We spoke to some of the top players such as LenDenClub, Faircet, Finzy, Lendbox, among others, and industry experts to understand the muted situation.
Mature business models
According to Bhavin Patel, co-founder and CEO of LenDenClub, each industry goes through a gestation period after initial funding.
Drawing a parallel with the e-commerce industry, he gives the example of Flipkart and Myntra, which took their time for about four to five years before landing their first rounds of funding and then transitioning into gestation mode.
“As they started to grow and mature, the fundraising boom happened, and the rest is history. Likewise, P2P lending has gone through its own phase of growth all these years and to this day, ”he adds.
Today the sector is divided into two parts. Out of total of 21 NBFC-P2P approved loan companies in India, only four to five are mature players with solid business models, and the rest are still in the making. This is one of the reasons that financing has not made sense to both investors and businesses for all these years.
“If the investment had come earlier in the P2P segment, it would either have reached maturity faster or had collapsed and moved in another direction. It didn’t work both ways and three to four major players had enough time to mature their models and run a successful business, ”Patel said.
Not a sector hungry for capital
The real need for money in the P2P lending industry is for two main things, explains Narayanan Mahadevan, Associate Director, Grant Thornton Bharat.
“Customer purchase (both lenders and borrowers) and platform maintenance (analysis and management to better underwrite the borrower) are the two main costs. Otherwise, the money is between the lender and the borrower and the platform charges a fee. There is no need for funding of $ 200 million in the P2P sector unless you plan to advertise, ”says Mahadevan.
This is one of the reasons we won’t see colossal investment checks in the P2P segment. It will always be in a decent range for product development and technology upgrade.
The crisis cocktail (early 2020)
As P2P lending players neared maturity with strong business models and products compliant with RBI regulations, they bowed in the face of a host of other issues – the “cocktail crisis”. This slowed their journey further, with investors holding back.
“There has been a general lack of active economic advancement for the past three to four years. The entire credit industry was pulled down in the early 2020s following a series of events like the collapse of Yes Bank, REIT regulation, etc. Then came COVID-19, which hit the credit industry the most, ”says Siddarth Pai, Founding Partner of 3one4Capital.
The cocktail will continue to be brewed until 2022, he adds. It wasn’t just P2P lending, but the entire lending industry that experienced a downturn.
Restriction keeping investments at bay
In addition to the “cocktail of crisis” which dampened the general feeling of investment in credit, the collapse of China’s P2P lending industry in 2017 cast a black eye on the entire segment.
This is one of the reasons the RBI came out with stricter standards – a subject of debate among stakeholders.
In accordance with RBI regulations, we can invest up to Rs 50 lakh on P2P platforms, and the exposure to a single borrower cannot exceed Rs 50,000. This means that if you want to invest Rs 50 lakh, you need 100 borrowers on all platforms. The minimum investment amount is Rs 25,000 and the duration of the same loan cannot exceed three years.
“The upper limit of Rs 50 lakh limits the scope. The opportunity will increase as the cap increases in addition to net worth as this will lead to wider participation. No investor likes high market caps, ”says Pai, who points out that the next round of changes is long overdue.
“When that happens (ease of regulations), the big investment will come,” he adds.
Similar views were echoed by Jaikrishnan G, Partner and Head of Financial Services Consulting at Grant Thornton Bharat.
“Business cases will certainly benefit if restrictions are relaxed – not only on the distribution or product side of P2P companies, but also on the operations side. The limitations make the sustainability of the model difficult, ”he says.
Experts are also concerned about the size of the business pie, which is limited due to regulations. With the exception of insurance distribution, P2P players are not yet allowed to provide other value-added services on the platform.
“The size of the pie decreases even if you have millions of customers because you only have two services to offer. How much money can you make with this? If you are allowed to add more value-added services and grow the size of the pie, investors will see opportunities to return and increase, ”says Jaikrishnan.
On the other hand, the founders differ on the point of view and say that the regulations have nothing to do with a potential investment and are necessary in India to avoid another debacle in China.
“The RBI has done a lot of things already. Financing the sector has nothing to do with regulation. One regulatory change will do nothing, ”says Amit More, founder of P2P lending platform Finzy.
Looking Ahead: Are VCs Sitting on the Fence?
Now that the industry has matured with players turning to more refined products, the discussion is on what next? Is he ready for his next big tour?
If we look at the post COVID numbers, the top P2P players have done pretty well. The annual execution rate of these companies has increased, and the majority of them have built strong product portfolios, with new ones on the horizon.
While Faircent and LenDenClub want to continue to focus on the growing business and create new products, Finzy and Lendbox are already in talks with several investors for the next jump, as reported at Your story.
“Fundraising is an ongoing process, not a continuous one. We are experimenting with our products like Faircent Pro with institutional lenders, building a more B2B B2C model in addition to user specific secured loans including vehicle and home category. Once our products solidified, we would need capital and a good investment, ”says Rajat Gandhi, Founder and CEO of Faircent.
“In about 6 to 12 months you will see us hit the market as we hit the 100 crore rupee mark by 2022,” he adds.
According to Finzy’s Amit More, the P2P lending segment will experience “mature transactions” (Series C and D) over the next 12-18 months.
“Someone will take the lead in the sector. Mature players are betting on products and will soon be raising capital. Since there are no trades in the sector, the VCs sit on the fence. A deal and the ‘fear of missing out’ will kick in and it would only be a matter of time before the funding valve opens, ”said More, who plans to raise around $ 8 million to $ 10 million. In the coming months.
The sector has experienced phenomenal growth over the past two years. Even during COVID-19, companies recorded solid numbers and doubled their revenues. LenDenClub became the first startup in the industry to achieve profitability in the first quarter of fiscal 21.
The growth phase has started, Patel says. “The money will start going into R&D and product development as companies stop offering vanilla loans to more user-specific products and large investments will flow in soon,” he adds.
According to a fintech expert, there will be a greater appetite for investors as they have been inactive for 18 to 24 months. There is sufficient liquidity in the system and ideal money. The P2P lending opportunity is great, especially SMEs, and they need to make the most of it.
“We have already started the process to elevate our next round,” said Bhuvan Rustagi, co-founder and COO of Delhi-based Lendbox.
“Investors are only interested in client-centric platforms building high-quality assets for their users rather than focusing only on subprime loans. We see ourselves as an investor / lender driven company that is creating a new asset class and investors are seeing the same as well, ”he adds.
The P2P loan has the potential to become the next mutual fund within the next six to seven years. Industry stakeholders agree to predict the next phase of growth in the segment.