Potential default rates on i-lend - Analysis

Much has been written on the high default rates in P2P lending and we at i-lend face this question almost everyday when explaining this concept and its benefits. Most people involved in the financial and banking industry have horror stories to tell particularly in personal loans , credit cards and to some extent even car loans. The question that has been repeatedly asked is ” how will you control default? “.

It is important to ask ourselves about the reason behind these supposedly high default rates in all forms of unsecured lending experienced by banks and financial institutions. Originally most of the credit card and personal loan institutions went completely overboard in their aggressive marketing and promotion of these products and created a vast eco system of agents DSA’s dealers, verifiers and so on with tough targets and even more aggressive performance goals. This eco system to stay economically afloat had to resort to various methods to keep the sign ups high and resorted to all kinds of shenanigans to deliver on the growth numbers. Forging documents, income statements, bank account statements, addresses and so on became  an industry in itself and loans and credit cards were issued without the basic diligence on behalf of the bank and financial institutions. Quality checks were non-existent, verification was corrupted and this resulted in an avalanche of defaults that have been well documented over the years.  In a way this is our own sub prime scenario.

Since the primary business of a financial institution is to lend basic credit appraisal parameters were systematically ignored in the hey days of the retail lending boom.  Coupled with the lack of awareness among the people on the implications of using these instruments and prudence use of the same resulted in a vast number of people while otherwise stable get ting to debt traps. Added to this is the complexity of financial charges imposed by these institutions led to a situation where in stable people preferred to default instead of keeping up with the payments which never seemed to end.

Therein lies the difference between I-lend and a financial institution. I-lend’s objective is not to lend, it does not have lending targets, it doesn’t borrow money cheaply and lend at higher rates. I-lend is a market place which seeks to bring people who need money to meet people who have surplus money and are looking for  a better return. I-Lend physically verifies all personal information about a potential borrower before a listing is allowed including education , employment details, address and other such information. It also structures the transaction between these individuals and thereby builds a deterrence against default and monitors the repayment performance thereby inducing good and responsible financial behaviour.The diligence used by I-lend is stringent thereby ensuring that people without proper jobs, income or other negative factors are not even allowed to list.

The decision to lend or not to is solely the preserve of the lender and only if the lender is satisfied with the prospective borrower does the transaction takes place.

Similarly in this networked society of today, social sanction is powerful in India and a borrower needs to belong to a social group which exerts a subtle yet important pressure for good credit behavior. More importantly proper repayment will be encouraged, bad credit behavior reported and that today usually acts as a major deterrent particularly in the urban context.

Through i-lend there are no hidden charges, WYSIWG. There are no prepayment penalties, flexibility to repay in tranches.

The other major difference is interest rates.Personal loans and Credit cards and private funds carry interest rates between 24% to as high as 50% in some cases and it is a well documented fact on the co-relation of high interest rates with high default rates. The interest rates on i-lend while not capped are mutually negotiated and anyone agreeing to higher than normal interest rate has a bearing on their overall financial condition which by itself can alert potential lenders.

Finally there is a cap on the maximum amount that can be borrowed which should keep away the professional borrowers.

I-lend will over a period help foster better credit behavior, make money available cheaply even to people who are not in the financial system and usher in transparency in financial dealings and offer better returns to people than conventional savings instruments.