How P2P Lending Is Driving Financial Inclusion In India

Imagine this: You are urgently in need of a loan. But instead of submitting dozens of documents to a financial institution or bank, or waiting for days for approval, you can avail the loan simply by providing documents online, complete verification and getting instant feedback.

It sounds implausible but a number of marketplaces globally are making this a reality and offering an online platform that matches lenders directly with borrowers. This is called Peer to Peer (P2P) or marketplace lending and is gradually gathering momentum as an alternative financing option.

Now, P2P lending offers many benefits both for borrowers and lenders. It is an online platform that doesn’t use any bank or financial institution, so there are no middlemen to pay. It offers an attractive rate of interest both from the borrower’s and lender’s perspective. It is quick to process and easily accessible. But above all, P2P lending helps drive financial inclusion especially in a developing country like India.

Social Lending

The concept of social lending combines several businesses, technological and social trends. Consider the following trends globally that propel financial inclusion:

1.    The concept of microfinancing, that is lending for individuals with few assets in developing nations. Micro lending provides small loans or microcredit​, to unemployed or low-income individuals or groups who would otherwise have no means to access financial services.

2.    Digital disruption has led to the disintermediation of several businesses. Technology and digital transformation have reduced the size, power, and number of business intermediates in many sectors including personal finance. This has made finance more inclusive.

3.   Widespread adoption of web technologies has enabled crowd collaboration. With new tools and social networks leverage have empowered individuals in unprecedented ways (for example, crowdfunding and crowdlending).

How P2P can play a vital role in financial inclusion:

P2P lending has the potential to make a significant contribution to the financial inclusion space. As a completely web-based financing option, P2P is highly accessible. People across age groups, genders, rural/urban divide can easily access the platform so long as they submit the required documents and details. 

Individuals with no credit or low credit history

It can be a Herculean task to find banks or lenders who will approve your loan if you have a poor credit history. There are often legitimate reasons for a short credit history. P2P lending platforms have their own evaluation criteria for rating and assigning a score to all types of borrowers, even those with a poor credit rating. The borrowers’ profiles may be graded as high-risk in such a scenario, but they are still eligible for a loan if they meet the marketplace approval.

SMEs and banks

A significant part of the population is still exploited by moneylenders because they are underserved by banks. Take, for instance, small and medium enterprises(SMEs) that have a tough time accessing finance from banks because of inflexible and outdated banking approaches. Many SMEs simply lack the credit score, collaterals or cash-flows required by the bank. Even economic surveys have pointed out that SMEs in India are credit starved.

Since SMEs are indispensable to the economic growth and competitiveness of any nation, P2P platforms can play a pivotal role by providing financial assistance to SMEs. This is possible of the wider and more flexible range of data sets that P2P lending uses to approve their borrowers.  P2P lenders leverage technology to simplify the lending process, improve speed, offer price transparency and reduce the SME’s overall borrowing cost. This is financial inclusion at its best.

Alternative investment vehicle

P2P provides an alternative, atypical financing source for borrowers and lenders. If you observe the trend across P2P platforms, several funding requests are simply for consolidation of loans taken from sundry sources. For borrowers who have suffered because of moneylenders, or have faced rejection from banks P2P offers a cheaper, faster and more transparent means of raising the money.

Many investors are in fact looking at P2P lending because it fulfills a social gap and helps them connect with genuine and deserving borrowers. You can potentially help someone to break free from high-rate debt, help entrepreneurs or empower activities that are positive for the community.

In a nation like India, financial inclusion matters because it empowers development across the board. Something as simple as having access to financial services can be a game changer for individuals and small businesses.

P2P lending combined with the power of mobile technology and digitalization, can break through conventional barriers and include those who have been traditionally excluded.