Faircent : The Indian P2P lending story
Time and tide wait for none. With each tick of the clock time brings with it the relentless advancement of technology which brings with it the destruction of the status quo. But then we need to dispense with the old to make way for the new. One such incursion of technology into what used to be a hard-core finance field is lending of money. P2P lending or peer to peer lending is, as its name suggests, a loan arrangement between two peers. It is based on the observation that loan penetration of the formal banks in the lower reaches of the society is extremely poor. This void is filled by moneylenders who get away with charging exorbitant interest rates. Even in cases where the banks are able to reach the customers in need, saddled by high administrative costs and their inefficient business models, they need to charge a certain rate for the venture to be profitable. On the lender’s side, with conventional assets like real estate getting increasingly out of reach, and FD rates not good enough, there is a latent demand for an asset class that offers better returns than FDs but does not involve the risk of the stock market. This is exactly the raison d’être for P2P lending. With average lending periods less than a year, the P2P lending offers similar liquidity as FDs but offers much better returns.
One of the pioneers of P2P lending in India is Faircent. The company was founded in 2014 by Rajat Gandhi along with Vinay Mathews and Nitin Gupta. The idea came to Mr. Gandhi on Facebook when he saw a friend of his asking for money on the social media platform. Recalling the incident, he says “He once wanted to buy a motorcycle and he had posted on Facebook requesting his friends and family for a portion of the funding, and in a week, he was riding his motorcycle to office. This incident, coupled with my knowledge and experience in building online exchanges previously, led to Faircent.com”. This was back in 2011. At that time Mr. Gandhi felt the conditions to be unsuitable for a venture of that sort. It wasn’t until 2014 that he decided to act upon his idea. In just over two years since its inception, it has over 6,000 registered lenders lending to 26,000 borrowers and disbursing loans amounting to Rs 6.5 crore per year. Funding through Faircent.com crossed the INR 1 crore per month mark in August 2016.
So how does Faircent connect lenders to borrowers? The process begins similarly in both cases, you must first register yourself on the website and give a proof of your identity. If you are looking for a loan, you have to give your comprehensive financial record including your CIBIL score, your PAN card number etc. In all the company uses about 200 data points and runs them through its algorithm to rate the creditworthiness of the borrower. The company rates borrowers into 5 categories: minimum, low, medium, high and very high and charges interest rates accordingly. A list of such borrowers along with the relevant financial, credit and personal details is made available to the potential lenders. The company is mindful of the need for protecting privacy though and does not disclose unnecessary information and any information that it discloses is done so only with prior consent. Once the lenders and borrowers are matched, the loan is made legal through a document. Recognising the risk involved in lending and the need to mitigate this risk it is mandated that a lender invest only up to 20% of a borrower’s loan requirement. In case of loan default there is a penalty levied on the borrower for late payment. In case of non-payment, Faircent helps in conducting legal proceedings to recover the loan amount.
The potential of a new field is best capture by a VRIO analysis. The value proposition of the industry seems convincing with a good potential for market being there. Faircent being one of the pioneers do enjoy an early movers advantage and are among the few in the country who are currently providing P2P lending platform. This warrants a fairly amount of rarity. While the founders of Faircent will wax eloquent about the sophisticated algorithms used, the fact of the matter is that it is not something that is inimitable. Organisationally, the founders seem to have vision and purpose about them. They seem to be able to have a good read on the industry and seem to be in a position to scale. Hence, they do have a fair it of organisational prowess. The company comes out of the vrio analysis satisfactorily.
Faircent makes money by charging a one-time registration fees of Rs 1000 from both borrowers and lenders and taking a cut out of the loan amount from both borrowers and lenders. A 1% fee is charged on disbursement of loan to the lender and anywhere from 2–4% is charged from the borrowers. This business model, Mr. Gandhi feels, is sustainable and says gives him yields of 6–7%. He expects to break event within the next 3 years if the winds continue to blow favourably.
Speaking of favourable winds, one big step in legitimising the P2P industry is the guidelines that RBI is expected to issue shortly. The apex body is set to formally recognize the P2P lending platforms greatly giving credibility to their business. P2P lending platforms are expected to be registered as NBFCs and guidelines regarding the governance, permitted activity, and the reporting activities are expected to be made clear. The platforms could be expected to be capitalized by at least 2 crores which means only serious players can remain in the market. One cause for concern however is the possibility that RBI could issue guidelines that interfere with the working of the platform on issues like the interest rate etc. The RBI has also indicated in the past that it would want the platforms to have some skin in the game rather than purely be facilitators of the transaction. This has been met with marked resistance by Faircent which prefers to simply play the part of the facilitator. While I feel this could hurt Faircent in the short term, the newer inventors would be happier to trust Farcent if it had some stake involved.



Upon analysing the company’s lending patterns interesting facts emerge. The demographic pattern of its borrowers strongly correlates to the usage of internet and cellphones, with the borrower likely a male in late 20s or early 30s. The increasing push for a cashless economy is definitely helping it with the sales getting a bump in the aftermath of demonetisation. The investors who diversify their lending and mitigate their risk tend to maximise profits with risk-adjusted net returns as high as 26%.

Looking ahead Mr.Ghadhi predicts P2P market in India can attain a size of 4–5 Billion USD in 4–5 years. He is confident of his own company to fulfil the growing needs of the people and says
“With the help of technology, P2P lending can bridge this gap. For example, a major portion of the loans transacted are by micro and SME sectors and there are 57.7 million small businesses in the country “
It remains to be seen how well Faircent is able to capitalise on its promising start but I for one am not betting against Mr. Gandhi