Peer to peer (P2P) lending is taking root in India and Monexo is among the earliest players to establish a lending platform. After Hong Kong and India, the company has plans to enter into Singapore, Philippines and Indonesia. Mukesh Bubna, founder and CEO of Monexo, talks about the inherent scalability of the business and the company’s plans to Pankaj Joshi.
What is your business focus?
Our business structure focuses on P2P lending to three segments of borrowers – salaried individuals, practising professionals, and small and medium enterprise (SME). Right now, however, we focus only on the salaried individual segment. Firstly, demonetisation has impacted both the other segments. Then again, SMEs are operationally impacted by the existing tax deducted at source (TDS) structure which is not friendly when it comes to borrowing from multiple sources. This structure needs to be simplified for P2P lending to take off in SME segment. We have made a representation to the authorities. Post GST implementation, we would look at other segments, maybe second half of FY2018.
Our typical borrower profile is salaried, aged 25-30 years, with an average salary of Rs 25, 000 for which the average borrowing works out upto Rs 1.50 lakh. Such a working population today is much more independent and amenable to migration. This in turn brings a lot of minor expenses and there such loans are very useful. Such borrowers are often under the under the banks’ lending radar who offer them Rs 8-10 lakh loans to start with but we create options for them (based on the amount requirement). The borrowers that we target are usually digitally savvy and appreciates the benefits that we bring to the table.
What are the benefits offered to borrowers?
First and foremost is time-saving. The borrower is made known in a minute if the loan is available or not.
Secondly, the process is digital. There is no upfront requirement of physical documents. The applicant needs to upload four scans – Aadhaar, address proof, bank linkage (account statement) and a salary slip. With these, Monexo can pull out data and check the background, since it is a member of IndiaStack.
Another benefit of Monexo is that it is active in the entire activity chain of P2P lending – origination, screening, profile-grading, pricing of each application, disbursement, client servicing and lastly debt collection. This is right now a key differentiator among our contemporaries. Our process is largely system-driven with the only physical intervention being the actual scrutiny of original documents.
Describe the business structure and how it would attract lenders?
Our business structure as another differentiator. P2P companies do not take deposits, it is just multiple lenders lending to multiple borrowers. Repayments then are also multiple by nature, which is cumbersome. We have done a consolidate transactions under IDBI Trustee, which collects from all lenders and through escrow lends to borrowers in a single transaction. This process simplifies matters for all concerned and the trustee mechanism costs are borne by Monexo.
Our fees are taken out of repayments made to lender (2.5 per cent) based on their actual EMI receipts. The lender here gets the following benefits – he can manage multiple accounts; he can improve yields on his lending; he can diversify and create a loan basket; and lastly he can track and carry out the collection without any staff.
Borrowers are graded in categories from M1 down to M8. They get an automatic upgrade when they create a repayment track record. One key criteria is that debt should not be more than 60 per cent of the borrowers’ income. Our experience has shown bad debt frequencies in M1 are 0.05 per cent and from there to M8 they rise to 4 per cent. Hence, we advise lenders to make a proper weighted portfolio and have a risk profile of 2 per cent on their loan basket.
Our typical business process is approval of only 25 per cent of the applications submitted. This is because most of the 75 per cent are already defaulters somewhere. They apply here thinking that P2P lenders do not have skills, science, databases and no skin in the game. So, they would get away. We have invested in the scrutiny process and aim to be responsible to lenders and build their trust.
Lender scrutiny is based on the banks’ KYC system. They need to submit their PAN, Aadhaar and bank account details from which disbursements will be made and to which EMI transfers will be made. Banks typically maintain a database of sensitive individuals and their kin, including categories like politicians and right upto terrorists, drug mafia and other offenders, based on data from all over the world. Monexo follows this system to make sure there is no scope of any kind of money laundering from the lenders’ end. We recognise that P2P regulation is evolving and it is upto the industry players themselves to be proactive. Lender requirements differ region to region – in Delhi they focus more on yield against Chennai who focuses on product understanding, education of the business and lowering of risk.
How do you see the industry evolving?
The industry today is worth around Rs 30-40 crore. Sooner or later, the trust mechanism will become key for functioning as it is difficult for lenders to manage multiple transactions (also in case of borrowers).
The industry practice is to educate not only lenders but also borrowers.
The industry can take off when:
• Regulations coming in would define and broad-base the activity
• Consolidation happens
• Institutional players entering the funding side.
The Government’s draft guidelines on the P2P industry is positive – it recognises that this industry fulfils an existing need which is not serviced. If things fall in place, the current industry size of Rs 30-40 crore would go to Rs10, 000-15,000 crore maybe in four years. To give perspective to this statement, today India has an aggregation of around Rs 3 lakh crore personal loans. This figure in 2012 was only Rs1.50 lakh crore. Now you can understand the forecast figure is quite achievable. As a structural move, integration with payment banks would be good for the industry.