Does India need social lending?

In the Indian Social space the inequities surrounding the availability and cost of money have been documented repeatedly. You can negotiate a reasonable interest rate with your banker, only if you are a A + customer and as a MSEME or an Individual you are far from that, which automatically means that one pays a lot more than one can.

This leads to its own set of problems both to individuals and MSEMEs. For the purpose of this blog, I shall stick to individuals with MSEMEs have an entirely different set of problems. All of the us know that this is because Banks raise money at a lower rate and part it with us at a higher rate. The rate depends on the risk profile as assigned by the bank with little or no transparency in their analysis of your situation and assign a risk profile to you. Most of these risk assessments are dependant on past data and in a country like India, where data integrity is very low, without laws to regulate the sharing of this information including recording and updating  it, becomes a very subjective and arbitrary way of doing business.

They get away since the sheer market volume is so high that it masks bad business practices by these lending institutions say banks or NBFCs or who ever.  This lack of transparency coupled with low awareness and an overall apathy towards the situation, fosters it and to a large extent encourages it to thrive.   Attempts at correcting them have been few and far between and even educated, well positioned people in society would much rather avoid the situation rather than attempting to rectify this. Enough on the pain point, there are so many, getting back to the need for money lent socially with a reasonable rate, clued in to the end use purpose, a soft but clear repayment program will help a long way in addressing this anti social situation that has been hoisted on to the Indian public.  The need for lower rates, easier repayment norms, flexibility in managing the loan with option of pre payment without being penalised and for the retail investors an option that can beat inflation, give them better returns than FDR’s and not get over leveraged in the Stock Market are some considerations that is defining a space for this business activity.

While it is too early to say that P2P is a disruptive force, managed well, it has the ability to offer, build a completely new financial system overturning a host of previous punitive practices perpetuated by the present financial Institutions.

More so in India, cause of the family system that we have had and a few communities still practice, this concept of using the extended family, friends and peers has always been encouraged, adhered to and extolled and is seen as a virtue socially to have borrowed from relatives and more so to have been in a position to lend them assistance. Interest rates are low or non existent, no fixed tenure for the loans and other such soft norms have helped many a people raise money, resources and build their businesses, homes and so on over the years.  Today with rapid urbanization and migration families becoming nuclear, it is becoming difficult to raise money from friends or peers for a number of reasons, starting from delicacy to embarrassment for asking money, which still is frowned upon in the India.

But with interest rates hovering between 36% to 48%, Microfinance Instituitions lending at 24% to 36%, the poorest of the poor and the people in the urban space too who can ill afford to pay such costs for money are having to do so.

P2P or Social lending is one such way to ensure that institutional costs form a large part of the interest payment and that the money is being used for what it is intended for and moreover is available at a reasonable rate and has a clear process for repayment.

A Credit scoring / rating system different from the existing methods would be a good way to start building the P2P lending experience and manage it as a social business, while re investing the profits back into the business and expand reach, increase scope and improve availability to a number of sections of the people.