A Banker within Us - The Good Shylocks

“Commerce is the cure for the most destructive prejudices.”
- De Montesquieu

This blog is about Peer to Peer Lending, a very common practice followed in India from a very long time. The story of peer to peer lending is very old and famous in a country such as India. Let me start this with a flashback like an old hindi cinema.

Once upon a time there was a village named Rampur, a population of about 1000 people where most of them are in a profession of farming, blacksmith, priests, money lending, fishing, astrology, soldier etc etc. Money was always a constraint and dampener when there’s an occasion in the house or emergencies or if they want to buy something for their better living. Trading in livestock or farm produce with the moneylenders was the main source of borrowing money. However most of the money lenders were leeches ready to pounce on already rotten skin of poor peasants to suck their blood and keep them oppressed. In very small packets there was a sense of care for each other which gave rise to people borrowing from each other as a community. That was the birth of peer to peer lending.



Coming back to the modern era, in spite of advancement and modernization that we've had, we’ve not been able to bridge the differences between the rich and the poor. The rich became richer and the poor got oppressed every time in every decade. Rare were the cases where a poor would work hard and become rich, but yes they were the visionaries who helped India grow and be in a position where it can stand shoulder to shoulder with the best of the worlds. It’s not that the others did not have the idea or the confidence; they are the people who are always surrounded with the pressure of money. They are the ones who thinks about how to have the both the meals, only after meeting the same, they’d think of beyond that. Who meets their demand? Who provides them to start off a business venture? Very Few, in fact we can count them in our hands.

What about the people who come under lower to middle-middle class? Their needs are mostly satisfied by banks at high rate of interests, but still with the interest rates that are jabbed at them; don’t make their life any simpler. So far you’d have noticed that I’ve posed only questions, but what is the solution?

The solution to all the above is Peer to Peer Lending. Human society naturally evolves to create pools of capital to fund ideas and to share risk. Roman legionnaires insured one another by swearing to care for the families of comrades lost in battle. The creation of the shared stock corporation leads to better management of risks and funding of ideas. Whenever people come together to create a pool of capital, the potential for wealth creation blossoms. Peer to peer lending is a cheaper source of loan (10-12%) than a personal loan from a bank (18-21%). This is not something which is very new to the society, as stated earlier, apart from money lenders this was the major source of borrowing, but with a very high risk of defaults people were reluctant to lend.


The Concept

Create a web platform model where borrowers can place a request for loan amount between Rs 10,000 to Rs 10, 00,000 and the maximum interest rate they’re willing to pay and state their need. Similarly people & institutional investors looking for a slightly higher return of investment than in banks can state their minimum expected interest rates for the specific loan amount, access the borrower’s credit worthiness through their friends, group affiliations and endorsements from friends. The same concept then can be applied in Micro Financing with some modifications & tweaking.



Revenue Model

The site will be handling all the administration including local repayments and collections on behalf of the borrowers and lenders. It would generate revenue by collecting a one-time fee on funded loans from borrowers and accessing a certain percentage per annum as a loan servicing fee to lenders. It can also tie up with large corporate to provide loan to each other, their ancillary units and suppliers to ensure that working capital is efficiently met to meet the spurs in demands.

Rationale

Why does this make sense now? Because of the evolution of internet peer to peer networking has become much easier and simpler; connecting with likeminded people is just few clicks away. It is for the same reason, knowing the credit worthiness of a person becomes easier and his popularity among the social groups are helpful to lenders in deciding whether to give loan or not. The possibilities that are emerging are endless. A profound secondary effect of the down market will be an increase in the availability of peer-to-peer finance and its convergence with traditional lending. What may happen is that mainstream investors and banks will cherry pick the best investors in Lending Club and other systems – reducing risk by tapping their superior credit-assessment capability and fund them to grant bigger loans.

Conclusion

This if implemented in India would help us grow at a much faster rate and produce entrepreneurs to lead India to the future growth. Once institutionalized and drafted for risk coverage, this would be implemented in insurance industry, where insurance firms would pool in to take responsibilities in a similar fashion. Precise knowledge of local conditions would allow individuals to band together in order to underwrite the cost of ensuring properties in safe neighborhoods or to make it available for higher-risk neighborhoods. It is like raising a banker within us to capitalize on opportunities, harness growth and work towards a social cause. Unlike Merchant of Venice we are the “Good Shylocks”.