Peer-to-Peer Lending is defined as for-profit financial transactions occurring directly between individuals or “peers” without the intermediation of a traditional financial institution. This is how lending was done centuries ago, before banks emerged and became the norm: communities borrowed and invested directly in its members. The Internet has now made this concept available to virtually anyone, offering an opportunity for borrowers to get better rates, and investors to earn better returns. There is a general mis-understanding that Peer-to-Peer (P2P) lending is doing Microfinance the ‘tech’ way, almost to the point of branding P2P Lending as MFI-Tech. While there are similarities in terms of the size of the loans, similar interest rates, long lead times and high-collateral needs, a Microfinance is starkly different from Peer-to-Peer Lending.
Microfinance consists in providing of financial help to low-income families or individuals who traditionally lack access to banking and loans (a.k.a. the “unbanked”).
Differences between Microfinance and Peer-to-Peer lending
|Predominantly rural, and semi urban (sometimes remote rural too)||Predominantly urban (caters to the “missing middle class”)|
|Loan ticket size max is 60, 000/- (average loan ticket size in FY 2016 is 16, 394/- (Source – Business Standard)||Loan ticket size starts at 20, 000 minimum and goes up to 5 lacs|
|Payment frequency is mostly weekly or fortnightly (EWI/EFI)||Payment frequency is mostly monthly (EMI)|
|Doesn’t depend on KYC, no formal credit history always (only Aadhaar card mandatory for instant approval)||Relies entirely on KYC and a formal credit history|
|Loans are predominantly taken for income- generation||Loans are mostly taken for personal needs (debt consolidation is a big reason)|
|MFI customers are usually called members. They are most often part of a group or a close community.||P2P customers are either lenders or borrowers and completely individual in how they manage their loans|
|Loan liability on the company||Loan liability is on the lender, so its more personalized for the lender|
|MFI disbursals and collections are predominantly cash. The bank transfer model is picking up lately.||P2P loan disbursals and EMI payments are purely bank to bank transfer. EMI payments could be sometimes cash deposited in the lenders bank account|
Going by the above, there is no relationship or link between microfinance loan product and peer to peer lending. Urban MFIs have a income household parameter of minimum 1.6 lacs per annum. Do they have an individual income parameter? If yes, they could partner with P2P platforms and lend on the platform.
A question that is frequently asked by a lot of Microfinance practitioners is, How do we better design these P2P lending platforms to suit the needs of microfinance landscape, leveraging on technology, lower operational and transactional costs?
Going by what we have above, it is not possible to design a P2P platform to suit the needs of microfinance landscape. But it is a very important question to ask how MFIs can decrease their operational and transactional costs using technology. This is being addressed since almost 10 years with less success. Is it really possible to successfully implement BC/CSP model?
The BC/CSP model mandates the usage of bank accounts and there are guidelines regarding the availability of a bank branch from the CSP, distance-wise. It costs Rs.500/- or so per annum for banks to maintain a savings account for a bank. And zero balance accounts by themselves do not give banks any incentive, unless they get subsidies from the government. So, for BC/CSP model to work well, this whole process has to be well oiled and made workable for the banks as well. One of the best ways this can be done is, MFIs should mandate savings of 500/- per month or say, 100/- per week for all their customers/members.
MFIs have tried the BC model without great success. In a MFI scenario, it is not very easy to get a CSP who can handle the cash volumes. A hybrid model (of cash collection, BC/CSP model and a simple mobile banking model where P2P Lending is possible) could work wonders.