Peer-To-Peer Lender Faircent To Diversify Into Gold, Auto Loans

Faircent, India's largest peer-to-peer lending company, plans to launch gold loans next month and also intends to enter the auto loans segment, said Co-founder Vinay Mathews in an interview with BloombergQuint.

How It Works

Mathews explained that a borrower can take the gold to Muthoot, who will value the gold and act as a depository. Based on the value determined by Muthoot, Faircent will list the borrower on its website with a credit limit of 60-70 percent of the value of the gold.

Muthoot Fincorp is the gold loan arm of Kerala-based Muthoot Pappachan Group.

In the event of a default by the borrower, Muthoot will auction the gold and the proceeds will go to the lenders. The balance, if any, will go back to the borrower.

A senior executive at the Muthoot Pappachan Group said the deal between the two companies is still to be finalised and added that he would not wish to speak about it at this juncture.

Faircent also plans to find a partner for automotive loans, Mathews said.

Why Is This Significant?

According to data cited by the Reserve Bank of India, total lending through peer-to-peer platforms globally at the end of March 2015 had reached 4.4 billion pound sterling. In 2012, this number stood at 2.2 million pound sterling.

The numbers in India are much smaller, but, according to Mathews, the disbursements are likely to go up very quickly. At present, loans worth Rs 1 crore are being disbursed on a monthly basis on the Faircent platform.

“We are growing 100 percent on a quarterly basis. Market place takes time to really kick in. Even 1 crore is a very small number. We want to do 10 crore per month in a year's time. And then 50 crore per month and 100 crore per month in the year after that,” said Mathews.

In peer-to-peer lending, a group of lenders gives money to a single borrower, thereby diluting the risk of a default. But there is no collateral. Instead the peer-to-peer lender, like Faircent, guarantees a large portion of the principal amount if the borrower is not viewed as high-risk to begin with.

Peer-to-peer lending is a young industry globally and even more so in India. Companies operating in this space function as facilitators. They provide a meeting place for retail lenders and borrowers.

So for example, if an individual wants to take a loan, but is unable to get one from a bank, he can register with a peer-to-peer lending company. He discloses his financial records to the company and if he meets the company's criteria for a borrower, he is listed on the platform as a borrower. Lenders registered with the company can then bid to loan money to the borrower.

The system, according to Mathews, is skewed in favour of the borrower because he can choose the best interest rate from the bids submitted.

The Need For Regulation

So far, peer-to-peer lending has been an unregulated activity in India. The Reserve Bank of India has put out draft regulations but is still to finalize them.

It has been proposed that peer-to-peer lenders be registered with the RBI as non banking finance companies and that such companies maintain a minimum capital of Rs 2 crore. The RBI has also asked that peer to peer lenders have a brick and mortar presence and refrain from any advertising that suggests outsized returns. While the regulator has not suggested any prudential limits on lending, it hasn't ruled out such limits being imposed in the future.