As the industry is gradually surfacing into the mainstream, Brahma Mahesh Khaderbad, Co-founder and CEO, FinMomenta, a Singapore-based fintech startup in an interview with Techseen explains how P2P platforms have managed to cause their fair share of disruptions.
Techseen: How are peer-to-peer lending platforms transforming the consumer lending industry?
Khaderbad: Peer-to- peer lending is a paradigm shift for entire financial industry. Over the years it has proved to be a streamlined lending process. Today, Consumers are increasingly looking for investment products that generate higher returns than traditional savings accounts offered by banks. At the same time millennials are becoming a larger portion of the consumer loan market as they seek
credit to finance major purchases or refinance their student debt.
In the current scenario only about 10% of the population in India get financial help from Banks as they highly rely on Credit Bureau Scores to evaluate borrower creditworthiness. Consequently, large number of loan applications gets rejected and the applicants do not get the loan sanctioned by Banks. But with the simplified lending process, P2P lending is filling the gap.
This is where platform like ours have emerged as a game changer in the consumer lending industry
as we have our own proprietary credit scoring model to identify borrowers’ creditworthiness. Since
inception we have covered large population who remain un-served by Banks. Borrowers are not
required to move out of their home/office and visit a bank; they can apply for the loan anytime
from anywhere and avail a loan.
Techseen: You are planning to raise $2 million to $5 million by the year end in Pre-Series A funding. How will you utilize this fund?
Khaderbad: Yes we are planning to raise Pre – Series A funding by the end of 2017 and we plan to utilize the funds for business development, product enhancement and technology. This will further add to the growth of our company and maximize shareholder returns.
Furthermore, we are in the process of partnering with NBFCs to fund loans for specific products. We will also utilize the funds for providing First Loss Default Guarantee (FLDG) to the NBFCs.
Techseen: What credit scoring model do you use to assess the creditworthiness of applicants? What are the metrics you use?
Khaderbad: Our P2P lending model is growing in popularity with borrowers because of its perceived low interest rates, simplified application process and quick lending decisions. We use a proprietary credit decision model, designed with cutting edge technologies like Artificial Intelligence & Machine Learning. This proprietary credit scoring model evaluates between 500 – 800 parameters to identify the creditworthiness of the borrower. We have a 360 degree credit scoring that includes analyzing
the stability, repayment capacity, social reputation and integrity of the Borrower.
Techseen: How have you been monetizing on your FinTech platform? Which are your best markets?
Khaderbad: Our platform Tachyloans charges a one-time non-refundable registration fee to both lenders and borrowers. In addition to this, flat 2% service fee is charged to the lender and a service fee between 2% – 5% is charged to borrowers on fulfillment of loan.
The consumer credit market in India is currently at $300bn out of which $98bn is the personal loans market. The market is currently growing at 14% year on year. The SME business loan market is currently at $600bn and is expected to grow to $3.4 trillion by 2022.
Currently Tachyloans is present in 50 cities in India. We are looking to expand our footprint to 200 cities for personal loans and 50 cities for business loans. We are also planning to expand the platform to other Asian countries by 2020. Our major focus is to cover tier 2 and tier 3 cities in the immediate future.
Techseen: You have revealed plans to launch a loan offering exclusively for small businesses. What has prompted this move and how can it help expand your customer bracket?
Khaderbad: Small and Medium enterprises (SMEs) sector contribute to nearly 45% of country’s GD, growing at an annual rate of 11.5% and employs close to 46 crore people. However, most of these units remain un-served or under-served by regular lending institutions such as Banks and NBFCs due to their stringent lending policy.
Lack of awareness, obsolete data models, inadequate access to banking services, etc. force these businesses to either close their operations or depend on expensive financing from the unorganized sector.
SMEs in India are expected to be a $25.8 bn market for the emerging technologies by 2020. It is here that we see a huge business opportunity ahead of us. Reaching out to this under-served sector will help us expand our customer base.
Techseen: How are P2P lending platforms regulated? Is there any government involvement to supervise them?
Khaderbad: Currently there are no regulations by government for P2P platforms and no Licence available. However, RBI is expected to issue guidelines on the capital structure of the company, permitted activity, governance and the reporting activities. The platform could be expected to be well capitalized upto Rs. 2cr that in a way will only allow serious players in this space.
There could be guidelines on governance also where the management team could be expected to have bankers on board. This guideline will again help bring domain expertise and experience that is much needed by the platforms. The reporting activities are well needed to ensure that frauds are contained and the right borrower is given a fair opportunity to get a loan at the right price.
On the whole, we believe that the much awaited RBI regulations will only make this space attractive for individuals to invest in the loans to earn higher returns and make way to provide loans to the wider spectrum of the borrowers thereby facilitating financial inclusion. RBI recently released a consultation paper to bring P2P platforms under its purview and the final guidelines are expected to be released by the end of July 2017.
Techseen: Since a client does not need to put up collateral to compensate for a non-payment, what are the consequences to defaulting a loan on your platform?
Khaderbad: Borrowers on our platform are not required to submit any collateral. We proactively remind the borrower of the payment due well in advance and keep a track of borrower’s repayment behavior. In case of a loan default it would be reported to Credit Bureaus and will affect the borrower’s credit score.
Techseen: Are you planning to increase the ticket size of your loans, which is capped at Rs 5 lakh?
Khaderbad: We believe that under personal loan segment maximum ticket size of Rs. 5 lakh is a good amount. However, this may vary from case to case and if there will be a need to fund higher amount, we may consider a revision if the requirement is genuine. We will also be soon launching SME loans for which the ticket size would range between Rs. 5 lakh – Rs. 50 lakhs.
Techseen: Do you think it would be better for banks to oversee operations at FinTech companies like yours, or to work together to provide a good overall service?
Khaderbad: Working in alliance with company like ours will add value to Banks as they can make use of the advanced technologies adopted by us in evaluating the credit worthiness of the borrowers. This will help banks reduce the cost for customer acquisition, increase their profitability and enable them to provide loans at lower interest rates.
Techseen: In the US, P2P platforms issued approximately $5.5 billion in loans in 2014 and PwC indicated that the market could reach higher than $150 billion by the year 2025. What are your observations about India?
Khaderbad: In India, we do not have any official figures on P2P lending business, but with RBI final guidelines expected to be released by the end of July 2017, P2P lending platforms will see a huge boost up.
Credit under personal finance segment in India has grown at a CAGR of 7.57% since FY 09 from $54.7bn to $98bn in 2017. There is also a large Market Cap Opportunity of $600bn lying ahead for Private Banks, NBFCs and FinTech companies which is expected to grow to $3020bn by 2027.
Tele-density in rural areas has grown at a CAGR of 71% from 2007-16, opening the doors for digital banking. With almost all the services going online, we expect Digital Finance to constitute at least 10% of overall lending business in the country by 2022.
Techseen: What are the challenges you faced while setting up the company?
Khaderbad: When we had set up our business, there was no verification module available to verify customer data, there were no agencies/companies ready to carry-out physical verification. Banks did not agree to open an Escrow/nodal account. None of the trusteeship companies were ready to take the custody of lender and borrower money.
But now the scenario has changed and we have come a long way ahead. We have tie ups with banks, agencies and trusteeship company.
Techseen: What is your roadmap for 2017? Do you plan to launch in other countries anytime soon?
Khaderbad: We have launched our platform early this year and will disburse 1000 personal loans and 100 business loans by the end of 2017. The disbursement of these loans would be around Rs. 26 cr. In 2018, we have a plan to disburse 6000 personal loans and 400 business loans, totaling to a disbursement of approximately Rs. 115 cr. Moving ahead, we will expand our business to two potential Asian markets by 2019-20.