Innovative credit evaluation opens up a new investment opportunity

Peer to peer (P2P) lending is a new opportunity. It services those in need for credit, enabling them to borrow from individuals and institutions with surplus funds willing to lend. It’s all done without going through a traditional bank or intermediary.

The old v the new

P2P lending is being heralded as the next most potent source for alternative financing. It brings much needed relief to the unbanked and underbanked population of India by facilitating credit for individuals and MSMEs.  Our partner P2P Faircent.com are also committed to helping lenders earn higher returns from the money they choose to lend out. The evaluation process is markedly different compared to traditional lenders. Overall it’s fair and considers the interest of all stake holders. It’s a win-win situation for both the parties involved. 

Most traditional financial institutions, be it banks or NBFCs, have a well-defined process and a credit evaluation algorithm. These are based on a lot of hard policies and a rejection-first approach in place. A credit score is the most important and perhaps the only factor that most consider. However, this process alienates a large part of the population based on some historic criteria which may not even affect their ability to repay a loan taken now.

In sharp contrast, Faircent.com’s algorithm takes into account numerous data points to come to a credit decision. They also have very few hard policies, which makes every decision unique to the applicant and their requirements. The idea is to understand the ability, stability and intent of the borrower to repay the loan by evaluating across more than 120+ parameters using more than 400+ data points.

The key differences

Here are some of the ways Faircent.com differs from traditional banks when it comes to lending are:

Borrower location

In traditional financial institutions, borrower location plays a vital role as the probability of success of the loan sanction. It is almost directly proportional to the proximity of the bank to the location of the borrower. According to credit bureaus, around 17% of borrowers come from Tier 3 cities. But they can only apply for a loan if they have a salary or savings account in the bank they live closer to. On the other hand, P2P lending offers an entirely online process which does not require physical presence. Faircent.com is able to cover 465+ cities across India including a large part of semi-urban and rural areas. 

Credit history

The past credit and repayment history, and credit score of a borrower is a huge deciding factor on his future eligibility to take loans and creditworthiness. However, this has the unwanted side effect of New to credit or NTC population being unable to apply for loans. People in the NTC category have usually never taken a loan or used a credit card, which is why they don’t have a credit record. Sometimes, this trips one of the hard rules of major banks, and they become ineligible to apply for loans.

With the Faircent.com credit assessment approach, past credit score is an important but only one of the many factors used in deciding a borrower’s eligibility. An evaluation matrix is used to map the score of current earnings and future potential. This considers a much wider score range than most traditional FIs and banks.

Unlike banks, Faircent.com is not bound by interest rate mandates and can keep them as low as 9.99% to as high as 36+% to cater to a much fuller range of borrowers.

Gender

No bank or financial institution has any written policy that puts girls at a disadvantage while applying for loans. The reality is that access to credit for females is quite low in comparison to their male counterparts. In terms of borrower profiling, Faircent.com has observed that women borrowers make more timely repayments as compared to their male counterparts. Historically, loans to single working women as a category have delivered net returns upwards of 20% p.a 

The social impact

Many small businesses and self-employed Indians living in tier 2 cities and other suburban towns are denied credit by banks. Many are forced to exploitative lenders and an unorganised lending sector. P2P provides an alternative that is RBI regulated. 

Vineeta Singh, from Faizabad in Uttar Pradesh, is a social worker and a teacher with 10 years of work experience. She runs a training center for the underprivileged section where she holds computer and embroidery classes. She was faced difficulty in getting funds to set up another education centre under the Uttar Pradesh Kaushal Vikas Yojana. With Faircent.com sh was able to raise funds quickly.

Similarly, D. Digambar, a 51-year old small-time trader from Solapur in Maharashtra, dealing mainly in trading of coolers, old furniture and welding equipment etc. He was unable to raise funds to meet his day-to-day working capital requirements, even though he had a sound business and monthly income flow. Post physical verification at both residence and work, and thorough advanced tech-based credit evaluation, Faircent.com was able to validate credit worthiness. A loan was provided, helping another person achieve their business goals.

A P2P lender is not just helping the cause of financial inclusion but also helping improve liquidity in the economy and generate employment, while continuing to earn like a bank.

 

Summary

1. P2P is a win-win scenario for borrowers and lenders.

2. You can help social change selecting P2P as an investment.

3. With Cube Wealth, you access the most simplified P2P investing experience due to the partnership with Faircent.com.

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