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While e-commerce boom has been able to attract billions of dollars of investment from global funds and industrialists like Ratan Tata, the next round of action could well be in the personal loan segment.
In the eight months of 2015, at least 22 start-ups have been promoted in the online consumer lending segment, according to data analytics firm Tracxn. These alternative lending companies which promise to make credit available to customers at a low interest rate in just 24 to 48 hours, have received at least $27 million of investments between February 2014 and June 2015. Industry experts say that the success and evolution of large companies in the West such as Lending Club, Prosper and Lendup has spurred this wave of innovation in online lending in India.
Some of the online alternative financing companies which have launched or are about to launch their services such as Instapaisa, LoanCircle, Instaloans, Instakash, MonthlyInterest are being spearheaded by the big names in the start-up world who have successfully sold their first venture and are now looking for a new innings through consumer lending market.
For instance, Tanuj Mehdiratta who sold his mobile marketing firm Appiterate to Flipkart, has now launched LoanCircle, a peer-to-peer lending marketplace platform. Typically, these alternative lending companies work either as marketplaces for non- banking financial companies (NBFCs) or are NBFCs themselves with a minimum net owned fund of Rs 2 crore.
At the end of July this year, bank lending to the personal loan segment was Rs 12,18,400 crore, almost one-fifth of gross bank credit. New systems of financing can be especially helpful for the rural folk, many of whom have to turn to non-institutional sources of financing (other than banks, finance companies and self help groups). Over two-thirds of these sources (typically moneylenders) charge interest rates of 20 per cent or more, according to NSSO data.
Nikhil Sama-promoted Instapaisa.com, which will launch on September 15 will give out loans between Rs 30,000 and Rs 2 lakh. The company, which is currently working as a loan servicing agent for a mid-sized NBFC, plans to first lend in Delhi and gradually expand its reach to other cities. Instapaisa has also applied for a NBFC licence from the RBI.
Another company Instakash which launched four months ago, charges 2 per cent interest a month on loans it disburses. Its founder Gaurang Sanghvi who is now looking to raise $1 million from investors says his company is flooded with loan applications. These firms typically lend to individuals with good credit history or to those who do not have a credit history. “We lend to new economy guys such as freelancers, individuals who have landed their first job and looking to borrow,” says Sanghvi.
Most of the online lending firms use algorithms to create credit scores of its own by tracking a user’s social-media behaviour, educational qualification, online activities, such as e-commerce purchases and payment of utility bills. “The online lenders incur lesser operational costs and their marketplace model enables reach to a wider investor base,” says Neha Singh, co-founder of Tracxn.
“The ability of these firms to leverage available data and develop strong credit algorithms is important but what is equally crucial is to focus on collection and recovery mechanisms,” says Payal Goel, vice president, investments at Aspada Investments.
The banking system today is burdened with non-performing assets (NPAs) to the tune of 4.5 per cent of the total credit. But just like banks, online money lenders too have tie-ups with collection agencies for recovery of loans in case of default.