“Investors BEWARE…,” reads one review on the Facebook page of Faircent, a peer-to-peer lending company. Rather predictably, the comment was accompanied by a one-star rating.
“You will never get your money back if you invest through these people,” screamed another review.
This was followed by a string of positive comments with five-star ratings.
The pattern among the 196 reviewers of Faircent was clear. Those who loved the service were borrowers taken in by the hassle-free experience of getting a loan. The disgruntled one-star reviewers were lenders waiting to get their money back.
These reviews are a sign of the times for not just Faircent, but also for India’s peer-to-peer (P2P) lending scene in general. The companies involved — Faircent, Lendbox, LenDen CLub, i-Lend and i2iFunding — are online platforms that connect borrowers with willing lenders. The idea behind the P2P lending concept was to create a new savings instrument that will sit pretty besides investing in gold, property, fixed deposits, equity, mutual funds. But three years in, cracks in the business are already starting to show.
The Ken identified a group of 32 lenders — mostly businesspeople and savvy investors — who were drawn in by the 25%-plus returns that could be unlocked by lending through these companies. Today, they are far from happy. They had not braced themselves for the defaults. Of the 32, 18 lenders disclosed their portfolio details to The Ken; the contents were not pretty. Between them, they had lent Rs 4.3 crore ($631,656) to nearly 2,500 people. 26% of borrowers defaulted. To put this in perspective, let’s consider personal loans, which are lent without collateral much like P2P loans. According to bankers, these have an average default rate of 4%, with peak defaults still only around 10%.
In the last three years, the marketplace has become increasingly lopsided, with the needs of the borrower gaining far more precedence than the lender. As a result, the 32 lenders The Ken spoke to have all withdrawn from these marketplaces over the last year. But unlike a bank which lends out of depositors’ money or a non-banking financial company (NBFC) that raises money to lend, or even the new-age lenders who co-lend with banks, this model needs to make sure it has a constant supply of lenders on the platform. But with the situation for lenders far from ideal, what does the future hold for India’s P2P lending companies?
Why should banks have all the fun
As of now, P2P lending is still small in size, with only about Rs 343 crore ($50 million) being disbursed annually, according to industry insiders.