As P2P lending gathers steam, can Faircent stay ahead of its peers?

Faircent wasn’t the first online peer-to-peer (P2P) lender to come up in India. But last month, it became the first P2P lending platform in the country to be certified as a non-banking financial company (NBFC).

The official recognition came seven months after Reserve Bank of India (RBI) formulated stringent guidelines for the registration and operation of P2P lending firms. The move to regulate the nascent but fast-growing industry had been welcomed by some, but had also prompted fears that measures such as restricting lending and borrowing limits could prove counterproductive to growth.

For Faircent, however, RBI’s recognition represented vindication. “It was a tedious and thorough process,” says Faircent co-founder Rajat Gandhi, who considers RBI’s P2P guidelines progressive. “We had to work very hard on the regulatory aspects of this business model.”

For Gandhi, that process began in 2013, when he started Faircent with fellow Times Group colleague Vinay Mathews and later roped in Rediff’s Nitin Gupta as a co-founder.

Tough going

Like most of its peers, Gurugram-based Faircent brings together lenders and borrowers. While the loans - both personal and business - do not involve collateral, the interest rates are higher than what traditional banks offer. It earns by charging both parties a registration fee as well as commission - 2.5% from borrowers and 1-2% from lenders - on every transaction.

RBI’s rules meant that P2P players had to tweak their modus operandi to ensure compliance. For Faircent, operated by Fairassets Technologies India Pvt. Ltd, this process included steps such as modifying the registration process, borrower verification and disbursement limits.

In its existing iteration, interested individuals can register themselves on the platform, following which Faircent undertakes a verification process that includes authenticating KYC (know your customer) norms stipulated by regulators besides assessing the creditworthiness of the user and digital footprint, among other criteria.

Faircent has created an automated feature that matches a lender’s investment criteria with the borrower’s requirements. It automatically sends proposals to the borrower on behalf of the lender, based on pre-selected lending criteria such as loan tenure, amount, and risk profile.

Once an agreement is reached, the money is transferred to the borrower, who can repay periodically through EMIs over a decided time frame. An escrow account, operated by a trustee, is installed as a safeguard in line with RBI’s rules.

Five years since starting operations, Faircent has signed up 40,000 lenders and 3.5 lakh borrowers - only a fraction of which are active given that it has facilitated only 6,000 loans so far. That said, Faircent has mirrored the sector by growing rapidly in the last couple of years as P2P lending has caught on in India.

By 2016 - three years since it was founded - Faircent was only disbursing 50 loans a month. That number grew to 200 last year, before further doubling to 400 in 2018.

Faircent currently facilitates loans worth Rs 3.5-4 crore every month. The average ticket size is in the range of Rs 80,000, with a customer base that largely comprises millennials.

“We are now looking at a disbursement of Rs 70-80 crore in next 10-12 months”, says Gandhi, whose team has now grown to 60 people across 78 cities.

However, generating sizeable revenues remains a concern. Faircent's total income stood at Rs 66.9 lakh in the financial year 2016-17, up from Rs 28.1 lakh the previous fiscal, according to VCCEdge, the research arm of News Corp VCCircle. Its net losses tripled to Rs 5.46 crore in 2016-17 from 1.81 crore in 2015-16.

Even so, investor interest is growing. Faircent has raised more than $6 million in funding so far, with its Series B round taking place late last year - after RBI put in the place the framework for P2P lending.

Its backers include Belgium’s Incofin Investment Management, Bennett Coleman and Company Ltd, Aarin Capital, 3one4 Capital, JM Financial Products Ltd and M&S Partners.

Gandhi says Faircent’s technology, which provides end-to-end services from on-boarding to recovery, is what sets it apart from the rest.

But while Faircent will always be known as the first player to receive NBFC-P2P certification, it will have to contend with a crowded segment to remain the most prominent.

Scope for growth

There are at least 25 P2P players in India, with i-Lend setting the ball rolling in 2012. Startups such as LendBox, LenDenClub, Finzy, Cashkumar, and LoanBaba, among others also pose competition to Faircent and a number of them have also applied for NBFC-P2P licences.

According to Bhavin Patel, founder and chief executive of LenDen Club, three to four platforms including his own firm and Faircent dominate the space. He estimates that all P2P firms collectively have disbursed not more than Rs 150 crore till date - a tiny fraction of the loan market.

The jury is still out on whether RBI’s guidelines will result in this number growing significantly or instead arrest development.

Gandhi subscribes to the line of thought that the legitimacy granted to the sector will help the P2P industry “realise its potential”. But the fine print of the norms has made other players uneasy.

Among the chief gripes is that a single lender cannot furnish more than Rs 10 lakh. In addition, the Rs 50,000 cap on borrowers means that a platform would need to have lakhs of customers to run a sustainable business.

Platforms are also required to have Rs 2 crore as a net-owned fund, which experts say is a difficult proposition for new entrants.

These restrictions prompted one fintech firm, which did not want to be named, to withdraw from the P2P space. However, its founder did admit that the sector remains attractive and he may considering re-entering it in the future.

Dhiren Makhija, founder of P2P lending startup CashKumar which recently secured angel funding and applied for a licence, feels the sector will take shape over the next 4-5 years and can grow exponentially in India.

That optimism is echoed in a Morgan Stanley report, which estimates that the Indian P2P lending industry will grow to $4-5 billion by 2021.

According to various media reports, digital payments giant Paytm is also among those who have sought a P2P licence - a move that could well attract more investors to the space.