Are P2P lending platforms eating into banks’ pie?

The alternative model of lending is fast gaining prominence across the world and in India as technology advances have made the process of accessing credit more efficient. Although the peer-to-peer (P2P) lending market is at a nascent stage, it is expected to grow at a CAGR of 60% to $1 trillion by 2025 globally from $9 billion in 2014 . According to the RBI, India currently has around 30 online P2P lending with a current loan book of $25 million. NASDAQ has pegged P2P lending in India to reach $4 billion by 2021. 

In its recent report on fintech and digital banking, the RBI states that, “Since P2P lending companies operate entirely online, they can run with lower overhead and provide services more cheaply than traditional financial institutions." Some of these P2P lending platforms are expected to increase the availability of credit to micro, small and medium (MSME) enterprises. The online lending portals claim that loans to MSMEs account for a significant portion of their lending. The increase in lending to MSMEs by these platforms has coincided with the reluctance of Indian banks to disburse loans to small firms and start-ups. 

According to the RBI data, from an increase of 3.84% in outstanding credit to MSMEs in 2015-16, there has been a marginal rise to 6.61% in 2016-17. Starved for credit, currently, there are 486,291 sick MSMEs in India.

In March, Minister of State for MSMEs, Giriraj Singh, admitted in a written reply in Rajya Sabha that micro and small enterprises primarily turn sick due to problems of unavailability of timely credit. The gross non-performing loans of MSME units have also increased from Rs.70,841 crore in FY2015-16 to Rs.82,756 crore in 2016-17.