P2P lending in India. How does it work and are the risks worth it? (EP42)P2P lending in India. How does it work and are the risks worth it? (EP42)

[podcast]

 

How does P2P lending work in India? How safe is P2P lending? Deepak and Shray explore how the industry works, the risks involved and whether the returns are enough to justify the risks.

Summary:

• Banks keep a considerable spread between the interest they offer on a deposit and the interest they charge a borrower. So, some people think, why is the spread so big? Why can't I deal with the borrower directly and receive more interest on my money?
• The problem is you don't know the person you are going to be lending money to. In comes the P2P lending company, which acts as a sort of intermediary between the lender and borrower.
• When you give your money to a bank (as a deposit), the bank will guarantee that you will get your money back. But in the case of P2P lending, there is no such guarantee that you will get your money back.
• Another problem with P2P lending is, no one outside knows the actual default rates, and they are often much higher than what these companies report, even though the whole operation is legal.
• In P2P lending, you don’t see one of the three Cs of lending – you don't have collateral; you have capacity and creditworthiness.
• One of the reasons why P2P companies have flourished is that banks, which should ideally lend money to people whose credit might be questionable, don't lend to them. But the answer is not to 'lend' them money. You can consider it as a form of charity, in which case, even if you don't get the money back, you don't mind losing it. And there are companies that work on this model.
• An alternative could be microfinance. But there are problems there too. Often, multiple microfinance companies want to lend to the same borrower, who uses the money for purposes other than what they were intended for, with the result that they are not able to repay.
• But microfinance companies can take this pressure because they are a company. A P2P lending firm is just an intermediary. They have no way to recover the money if a borrower refuses to pay, except send legal notices (because there is no collateral), which may not work.
• So, the gist is, if you want to give loans through a P2P lending firm, only lend so much that you won't mind even if you lose the money. Give it for charitable purposes. Give it to people who are in such bad shape, they can't afford anything else.

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Full Transcript:

Shray: Hi, everyone, and welcome to episode 42 of the Capitalmind podcast. I'm Shray Chandra, and I'm here with the one and only Deepak Shenoy, who's just back from Goa. He has a tan, and he has a book coming out that's called 'Money Wise About Investing'. And he's publishing that with Juggernaut, and you'll hear more about that soon. But we're not here to talk about the book today.

On the suggestion of one of our Capitalmind PMS customers, we're here to talk about something I find super intriguing- P2P lending, and Deepak is very sceptical about this. So please listen in to today's episode if you want to find out about whether P2P lending makes sense for you, whether you're a lender who wants to make money on this as an asset class, or you want to help out some folks in need, if you're a borrower who doesn't like banks or can't get loan elsewhere, or you just want to understand the space and see if there's anything about the future over here.

With that, welcome Deepak, and let me just dive into the first question. From a lender's perspective or say, a person with money, what is P2P lending? And why can't I just put my deposit in a bank, which pays me a brilliant and exciting 3.5% these days?

Deepak: Hey, thanks, Shray. And, you know, it's great to be back on the show. It's been a good time in Goa. It's been exciting, fun, and now back to the grind. This whole concept of P2P lending got me thinking about how P2P lending has come about. Lending money is one of the oldest professions in the world. You lend people money because they need money. You have it, and they'll pay you a little interest on the way back.

Now, P2P lending, from a lending perspective, means you have money, and you want to give it out to somebody is a concept of saying, listen, you are always lending. I mean, you're thinking about it as a fixed deposit, but you’re lending money to your bank. Now, when you lend money to a bank, they take the money, and then they say, we'll give you a certain amount of interest.

Now what the bank does with it is not of your concern, but really what the bank does with is it takes your money and lends it out to other people. Those people have, you know, they take the loans. They may be running it for a business, a personal loan, or a housing loan. You don't care what that is. You're not exposed to that part of the equation. You say, well, you know what? I'm giving the bank some money. I am going to get some money back from the bank. It's very straightforward. The bank is in fact, the arbiter of this loan.

However, they stand guarantee in the middle. In the sense that if the person that they have lent to does not pay them back. The bank says, well, if he doesn't pay me back, I will still pay you back from my own money. So that's effectively what the bank is saying.

You or your counterparty exposure is to the bank. Not to the person who borrows from the bank. If there's a theft in the bank, you don't stand to lose any money. I mean, at least to the extent the bank can repay you, it will have to repay you. And banks have other guarantees and necessities and all that stuff. You say, well, you know what? What does the bank get when it does this? Well, it gives you a fixed deposit, and you get six percent on your money.

Shray: We wish! However, it's probably less than that these days.

Deepak: I mean, yes. It is wishful thinking. But you know, the issue with banks is they have other sources of being able to borrow. And so therefore, those sources are giving the money at such cheaper rates, they've been cutting down the rates they can offer you as a borrower because they're saying, listen, if I must give you seven percent, I have other sources I can borrow at five percent, five and a half. So maybe five, five, and a half is what I'll offer you as well.

So now, since the bank is offering you five, five, and a half, you must be thinking, well, you know what, then if I go to the bank and apply for a loan, I should be able to get what, six? Seven? I mean, how much does the bank need? The answer is, banks keep a huge spread, typically four or five percent in India, sometimes higher. So, you go to a bank, and you say, I want a loan, they'll say, I'll give you the loan at 10 percent. The minimum spread that they keep between borrowing and lending rates is two percent. So, the difference between what you can get from a bank and what you may have to pay a bank for interest is roughly two percent, the minimum, and usually, the spreads are four or five or six percent.

That means you may be giving the bank money, the bank's taking your money and giving it to somebody else and earning four or five percent in the middle. Now this sounds like a lot of money. I mean, if you're giving me at six and you're keeping four for yourself, I make six, you make four. You're making like three fourths or two third what I make just and it's not even your money as a bank.

What you are doing in this whole space is, of course, you're standing guarantee. Then you can say, I'll do one thing. I'll go to a different form and different forms exist. For instance, you can go give your money to a debt mutual fund. A debt mutual fund effectively loans money to other large companies, such as Reliance, LIC Housing Finance, all these different companies that exist, which issue bonds or non-convertible debentures. We've talked about this in one of the other podcasts as well.

Now when you give your money to a mutual fund, and it on-lends that money to one of the corporates. The corporate may be paying seven or eight percent. You will get that seven or eight percent minus the management fee of this mutual fund, which typically runs between 0.5 and one percent.

Shray: Well, much lower than what the bank was charging, in that case.

Deepak: The bank was charging you four percent; these guys are charging you 0.5 to one percent. What's the key difference over here? And we've seen this play out in say the DHFL case and a bunch of others, is that your money is when it is on-lend, onwards to somebody else, you bear that risk. So, if DHFL didn't pay back, and your mutual fund held DHFL, you take a loss. It may be only five percent of that fund, so that out of the hundred rupees you've given the mutual fund, you may lose only five rupees, but you still lost the money. The mutual funds themselves want you not to lose money, so they try to lend it to the most creditworthy borrowers. But sometimes...

Shray: They make mistakes...

Deepak: I mean, yeah, it's a part of the game, right? But unfortunately, we've had too many mess-ups in the recent past. However, this is common that, people in extenuating circumstances can't pay back. Corporates cannot. So that bankruptcy hits you straight. The mutual fund is not exactly an arbiter. It is just an intermediary that kind of routs your money straight through. And because it does that, they must reveal exactly who they have lent money to, monthly. Because you're bearing the risk, so it makes sense that you should know who you lend money is being lent to.

Deepak: This was great. Fantastic. You've gone to companies. How companies are not the only people who borrow. Now you're thinking, if I go to a bank, I borrow. Why can't someone lend to me directly and get rid of the bank in the picture? Why should I pay a bank 10 percent when the bank is paying someone else only six percent? Can't I make a deal with that end person? It's almost like saying I'm buying some fruit for 30 rupees a kg and a farmer is selling the same fruit for 10 rupees a kg.

Why don't I go to the farmer and offer him 11 rupees a kg? Wouldn't that be better for him? It's better for me, and we just get rid of the middleman. This is exactly what P2P lending is, and instead of you lending to a corporate through a mutual fund, you are now lending directly to another individual at the other end. The difference between the two is this - mutual funds can't lend to individuals. Mutual funds can only buy securities of corporates, and they are to be rated and all sorts of things.

So, you're not going to compete with a mutual fund, but you're competing with another bank. A bank can lend to an individual, however, you directly can lend to an individual. So why would you do this in the first place?

The first answer should be obvious. Listen, if I'm lending to another person on the other end, there is a risk that I assume. Now, this risk can be known. For instance, if I lend to a friend, I have a rough idea of whether he will pay me back, or he will not be back, or she will return the money in one year or two years, or five years. And I can have some control over the process because I can call them up and say, listen, I need some money. You've taken one lakh rupees from me, you can return ten thousand at least, and they will say, OK or not, OK, or so on.

So, this risk is known. And then there's an unknown risk where you say, listen, I don't know who the end party is. Like in a mutual fund, you don't have any control over who the end party is. So, you could do this concept of saying, I may not know the person because everybody I know already has money. Why don't I lend to people that I think need money and are willing to pay interest for it? And that can be, for instance, you hear of people pledging their gold for twenty-nine percent per year. Did you say twenty-nine? No, no. I don't want twenty-nine. I can do it at twenty-one.

Shray: Yeah, I might to do that...

Deepak: So, you can say that and say, why don't I lend to these people? I don't know who these people are, but if they're paying back loans at 29 percent, I'll give them 21 percent instead. So that is something that's another reason why you might think it's useful for me to lend to someone else.

Now the problem with somebody you don't know borrowing money from you is that there's a lot of work in finding out who this person is. They, you know, it's like, oh, is this person creditworthy enough? Have they taken loans from other financial institutions? How has their past repayment been? Now, you could do gold collateral. But in this specific case, we talk about P2P lending. You can't do any collateral, but we'll come back to that. So, money lenders do P2P lending, usually with collateral. So, they are people with money in a village, and people come to them for loans.

Well, you know, in a lot of places, factory owners, for their own suppliers, if you're doing garments, for instance, the factory owner will say, I'll lend you some money, you can buy the garment, you can stitch it and come to me. Eventually, I'll process it. But for the working capital, you take finance from me, and I'll charge you 24 percent interest. This is P2P lending with much more granular control over this entire process.

Shray: That might have higher margins than the garments...maybe..

Deepak: Yes. In fact, a lot of times, the issues that people face in a money lending situation cause them to believe that the money lending itself is a bigger part of the operation than the actual factory itself. But without the factory, they will not have any reason to lend money. So, sometimes the factory is run for the purpose that I will process the shirt you give me, but really, you ought to pay me that 24 percent.

Shray: A cynical start to our podcast!

Deepak: Yes, it is. It sounds like a little bit of a wayward or a different path, but we know it's very interesting because the financial models kind of lead into each other.

Sorry, coming back to where we are. Think of the P2P framework as a more professional framework, right? So now you say, OK, Shray wants to lend to somebody. He doesn't know who the somebody is, and he needs to get to know some standard parameters, like, have you got a loan? etc. What if there was someone in the middle? We'll call them the P2P company. This P2P company says, listen, I will find out everything about the customer you need to do. I'll get 100 people and I'll organize them in terms of their credit scores, their past loans and their historical repayment rates and why they want the loan and all of that stuff. You can come in and, you know, think of 'Tinder for finance'.

You look at each of these borrowers, you swipe left if you don't like it. You swipe right if you do. And you choose to lend out. The difference over here is it's granular. And think of it as tokenized lending, in the sense that if a person wants one lakh rupees, you're not paying the full one lakh. You're saying, listen, I will give you five thousand, but you may have, say, three lakh rupees to lend.

So, you're going to choose maybe 50, 60, 70, 80 people to be giving that money to. One person, you give 5000, one person, you give 10000 and so on. You are never 100 percent of a person's loans and 100 percent of your loans don't go to one person, and one person also gets money from a lot of other people. There is a reason for this diversification. The idea is that, one person defaulting doesn't hurt you so much. It makes sense from a lender's perspective that you shouldn't have all your eggs in one basket, so therefore you diversify.

This P2P company sits in the middle between you and somebody else, and it doesn't take any risk, just like a mutual fund. It just gets you the information, you make the decision to lend, and it always exposes you to any changes of behavior of that end customer by saying, listen, he's not repaying. They collect the repayments and then pay it onwards because now they're collecting one repayment for the customer, finding out which all people have lent that person money and giving them back their money in the kind of proportion that they've borrowed it at. Now, you have a problem in that if there is a default, it's entirely on you.

Shray: Ok, maybe this is where I'll step in a bit. You would ask me to look up where P2P lending was in India, and I read some articles from just earlier this year. They mentioned two fairly big names. There's a large company called Faircent. There's another one called LendenClub. And the numbers are big. I think this was Business Today or something like that.

I think Faircent, which was apparently the first one to get a P2P NBFC license, it has something like two lakh lenders and twenty-three lakh borrowers, which is pretty huge. And the same article says over a thousand crores and loans disbursed last financial year or this current financial year and a loan book that's almost twice that size. You were asking about the global number, and it was nearly a hundred billion. Again, not sure whether it was the loan book or amounts disbursed, but it's large either way, almost as an asset class, and that too a fairly nascent one or more recently formalized one.

But one thing which kept coming up in these articles, which was your point on defaults, is that, I mean, this is just how people sort of have a rule of thumb to understand. It is that if you're lending money out, let's say, 15 percent, but there's a default rate of 10 percent. Well, then you'll end up with five percent. That makes some intuitive sense to me. But when I said that to you, you were a bit sceptical. You said the math doesn't always work out. What's the deal there?

Deepak: Well, I think the problem here, Shray, is that the way it's put, it sounds correct. And the law of large numbers is that the math that works at small numbers works very badly at large numbers. I'll give an example. The example that you mentioned was, I lend one hundred rupees. I charge 15% interest. So, if everybody repaid me, I would get back hundred and fifteen rupees. Now, what if I have a default rate of 10 percent? Which means 10 rupees defaulted and these 10 rupees did not pay any interest either.

So technically, I have 90 rupees that repaid me. So, if 90 rupees gave me 15 percent, it's one hundred and three point five, roughly. So, my hundred became one hundred and thirty point five. I didn't become one hundred and five. It exaggerates itself even further at higher interest rates. So, let's say you charge 20 percent, but you have a 15 percent default rate. Now you might say, listen, and I should make the difference which is five percent. But you’re making two percent. Not five. So, at higher default rates, the numbers go even crazier, and at lower interest rates, it makes sense.

I'll give you an example of the small default rate. For instance, I'm charging 12 percent. I have a one percent default rate. So, what happens now is instead of 100 rupees giving me one hundred and twelve, ninety-nine rupees gives me one hundred and eleven. I guess I make that, A minus B only in cases of minimal interest rates, but a larger interest rate, things go completely berserk. I'll give you this. At 30 percent interest rates, you roughly must charge an interest rate of 30%. Well, 70 rupees must become one hundred just to make you break even.

Shray: Sounds like almost 50 percent.

Deepak: Almost 50 percent. Well, nearly 40 percent plus. You're talking of charging 40 percent rates if there are 30 percent default rates. And you're looking at me and saying Deepak, 30 percent default rate is obscene. But in our conversations with the people, we've talked to, they've told us that listen, 30 percent default rates are common. So that means if I lend a lakh of rupees, I can expect that thirty thousand of it will go under default. And I think we did the math also. So, we looked at, was it LendenClub, I think? It was complicated because they said only one percent or two percent to three percent or something defaults, but the numbers were much higher.

Shray: Well, I guess, default is, as their website made clearly, default is a technical term. And so, when they said that there's a default, they had some like math to justify it. But then you used a slightly more rule of thumb framework to say, look, if it's past 30 days due, past 60 days due, I would have considered this a default.

Deepak: I mean, if somebody hasn't paid you for 60 days, and you don't have any collateral. P2P lending in India says the P2P player cannot take any collateral. The borrower does not have to give collateral and should not give collateral, and the lender cannot take any collateral. It's not going to be gold-based finance and all that stuff.

Here's the interesting thing. If there is no collateral. And someone hasn't paid you for 60 days. Chances are they will never pay you. And, you know, especially if they promise to pay you and they haven't paid you. So, if you take the 60 days past due of almost all these companies…

Shray: It was almost double digits or higher, whereas the reported default rates were lower. So, as I said, they clearly have, I mean, no one is violating any laws here, so they're very pretty careful about what their default rate is and how they justify that. But I get your point.

Deepak: Yes. And the other thing that happens is, companies have vintage issues. For instance, if you have a highly fast-growing business and I'll give you the DHFL as an example because it was a lender that did go under. If you're growing very fast at 40-50 percent. Now, if I have 100 hundred rupees worth of loans this year. And in the subsequent year, I give another 50 rupees worth of loans.

Now I have a hundred and fifty rupees worth of loans outstanding. Off the first hundred, I have a default rate of, say, 15 percent. Because the first set of loans has defaulted now. The second set of loans has not yet defaulted. What has happened is my hundred rupees of loans has become...I look at it as an aggregate. I say listen, I have one hundred and fifty rupees worth of loans lent out, but only 15 has defaulted, so it’s only 10 percent.

15% default rate on the first vintage is now a 10 percent default on the longer-term vintage. Now you do the same math and say that the guy is growing 30 percent a month, and in three months, 100k has become 250k of lending. But the first vintage has defaulted twenty five percent. Now you're thinking, you know what, I've lent to such lousy borrowers that they start defaulting after three or four months. They pay me back for three or four months, and after that, they default.

If you look at that and you say that, give me a loan default rate by vintage, tell me loans given in 2019. What are their default rates today? What are the default rates of loans given in 2020? You'll see the numbers crossed 20-25 percent in a lot of cases, especially in P2P. Now we've had a crisis in the middle. But even then, I would say that the numbers reflected bad repayment rates even before this. And growth has masked a lot of it.

They look at you and say four percent. And four percent actually means seven, which could actually mean 15. I mean, you don't know what the numbers mean because you don't know how much growth has happened in the last few years. So, there were people in the public market space who would actually say, listen, let me eliminate the growth of the last year..

Shray: And then look at your default rates...

Deepak: And then look at your default numbers as a percentage of last year's numbers because it's unlikely that the loans that you gave in the last one year have a significant default rate. So, it's possible that the loans before that were. So, if I look at those numbers, is your NPA number very high? So high growth companies, typically, the default rates are understated.

Shray: That's just pretty much everyone in this space...

Deepak: I know everybody is saying it's a hot space, so they just grow. And I won't say that any of the players are doing this. But think of a player that is funded. You would have to bring down the default rates. It would just lend money to somebody, and he would repay. And so, if I find someone I know, I can say, I'll lend it to you, and you repay, and so on. Then my total overall lent amount and the repayment of that and the default rate of that, the percentage comes down.

However, it still means that people who have actually borrowed money from me, which is not this shady borrowing and lending back. I won't say that this happens. I'm just saying that since I have determined that this is possible. And in India, generally, everybody wants the fake-it-till-you-make-it concept. The fake it will happen. It's not that you know it won't. Unless you're an investor in these companies, you would have no idea that this is happening or not from the outside. So, if you are investors in these companies, in the sense you want to give them money, you can't even ask for these metrics.

Shray: Unless you're an investor,

Deepak: Unless you're like, you know, you have a VC-fund that is giving money into this company. If you're a lender to these companies, they're looking at you and saying, listen, you want to lend, you lend. You don't want to lend, go away because I'm giving you like 13 percent interest rates and so on. This default rate has a big bearing effectively on the rate that you should be charging. To give you an example, like I said, if I want to make 10 percent and my default rates are also 10 percent. So that means my 100 must become one hundred and ten. And if my default rates are 10 percent, what is the interest rate that I should be charging? I want to make 10 percent net.

Shray: Well then, 90 needs to become 110, which is 22 percent.

Deepak: I need to be charging twenty-two percent for me to make 10 percent. So that's the kind of numbers you're looking at. And default rates of under 10 percent are unheard of in this industry.

Shray: Well, they heard of. It's just that you disagree with them.

Deepak: Yeah, it’s like I disagree, and I have one eyebrow up.

Shray: Ok, but let's go there. Let me tell you a bit about how some other things I figured out about how the RBI and other people sort of make you get diversified. So, if you're an investor, you're only allowed to put 50 Lacs in total in this. And that's an interesting point because that's how much you need for a PMS as well, I just realized. Additionally, you can't give more than 50,000 to one person. So, if you're doing 50 Lacs and you want, the minimum number of people to lend out to is 100. Sounds reasonably diversified to me. And look, I wanted to play devil's advocate here.

Many of the criticisms you've raised, I completely get it. It's very intuitive, and I'm sure there'll be some pushback. But people say this about stocks and PMSs, and AIFs, and well, maybe not mutual funds, but folks in the stock market as well, right? That look, you're saying your return is this much, but there's vintage there as well. I want to know what your return is, but you're not telling me who lost money and who made money. So, if I may say, the criticisms you've levelled against P2P lending as an industry, don't they also apply to one of the industries we're in right now as well?

Deepak: In fact, not only does it apply, but I also think the regulators have recognized that it applies and asked people to make standardized disclosure. For instance, with PMSes until a while back, SEBI said, just tell us the overall return that you've given your customers now, they said, Oh, you can't know what, you have five different strategies, so you guys need to do time-weighted rate of return, include the cash component. That means you can't just tell me you've invested 10 rupees out of 100 hundred and then show me the return of 10 rupees.

So, it would give the whole numbers user time weighted rate of return calculation and use that as the return metric that you're going to demonstrate to your customers. They've done this for mutual funds where the mutual funds have a specific kind of way they must show. In fact, to the extent that a mutual fund buys a bond, it can't decide if the bond is valued at 90 or 95 or 100. These are metrics that comes from CRISIL, which you must use in order to determine how much that bond is worth…

Shray: Because people who pick a bond always think it's worth more than what the market says

Deepak: Well, you could tell me, I love DHFL. I don't care if it's defaulted. I think I mean; I know these guys; I know they'll return my money, and so I'll market it at 100. You couldn't. You could do that in the past because SEBI recognized that, Listen, I don't trust you. And you know what? You're wrong. Since they have said that they've established certain rules and credibility on valuations. They haven't done this for P2P loans.

For instance, P2P loans are considered bad NPA only if they go beyond, I think, 91 days. In fact, RBI requires you to disclose loans that are more than 360 days. I'm like, dude, 360 days, it's gone. It's finished. Nobody's going to give you back money after 360 days. In fact, after 90 days also, it's very peculiar. So, reporting standards, which are applicable to financial institutions who typically take collateral, have other ways of collecting payment, should be tighter for P2P lenders.

But you're right in the sense that we actually have the criticism, that applies to the PMS and the mutual fund providers is also being addressed by regulation. And I think in P2P also, it will slowly get addressed by regulation. However, I think there's one point that you make that you must be careful about. In a debt-based lending framework, your upside is capped. If you get 13 percent, that's all you get.

On the downside, you lose a hundred percent. In stocks, the downside is a hundred percent, of course, because you could lose all your money. But the upside is not limited to 10 percent. It's like upside could be anything, it could be 300 percent. And this is why in stock markets, people make money is that you get a few stocks that give you more than that hundred percent. And those stocks pretty much mean the bulk of your returns.

And you know what, if you look at any mutual fund, if you look at any large investor's portfolio, you'll find that one or two stocks account for like 80 percent of the returns or maybe three stocks. The reason for that is because they've just held those stocks on so long, and it's wiped away the sins of all their losers, which is like vintage wiping away sins of the past. However, in the vintage problem, you're just postponing the problem to tomorrow by hiding the data because newer vintages haven't defaulted yet. Whereas in stocks, growth is real. So, in the sense that if a stock price has gone up, it could be sold on any day for that price. That's why it's gone up so much. That's how you define the concept of it going up so much. I think while the regulation, while the concepts are similar, this upside capping kind of keeps P2P lenders at a much more disadvantaged position compared to most other higher risk and high reward instruments.

Shray: Ok, now. Let me weigh in on that with a few questions. Look, if you look at the market right now. Let's say someone came and gave you several crores of rupees and said, Deepak, congratulations, here you are. You look at the stock market, and it's been running, other than the last couple of days, it's been running up insanely for a year. You look at fixed deposits, they're like nothing. Savings bank accounts give you barely anything. Those bond funds, we used to like, those PSU and banking, they're like low single digits as well, or just north of five.

So P2P lending, I go to the websites, I see thirteen to twenty-five percent. That sounds pretty good to me. So, can you tell me, how am I getting 13 to twenty-five percent? Who are the people on the other side of this? And I mean, you mentioned right now that there isn't collateral like gold loans. I think maybe now's a good time to bring that in. And how do you weigh in on the fact that some prominent start-ups recently have, while launching this initially said, you know what, either implicitly or explicitly, they're like, we're going to try and make sure this is a success and curate people or make sure that you don't lose money. I mean, obviously not in such words, but I have tried to put a positive, and I think, genuinely helpful spin on it. So, where do you stand on all these questions I raised here?

Deepak: I think the first part of it is interesting in the sense that there are other risk instruments as well to invest into. So why doesn't a P2P not look as attractive as any of them? I think one of the things that happened in the recent past. We saw in Franklin, in UTI- a number of debt funds are also risky. They've invested in debt that was risky, and their repayments got halted in Franklin and very delayed. In UTI, there was a loss taken by the mutual fund. There was a bunch of these things that have happened in the mutual fund way also, but there are lots of standards and rules.

So, for instance, mutual fund, when it lends to a company, they can be collateral against that lending. A bank, when it lends to a person can take hold of the collateral or a car or gold or anything like that. The problem that microfinance players and P2P players have, it's the end person. The end user is a person who does not have to give collateral. In fact, it's mandated that P2P lending cannot take collateral, which means you cannot secure a loan against anything. You must secure your loan against the person's creditworthiness and the capacity to repay, not the collateral. So, you're missing one of the three Cs of lending. You don't have collateral; you have capacity and creditworthiness.

Deepak: Individual creditworthiness can vary quite suddenly. I can be creditworthy. Suddenly, I get hit in an accident. I lose my job. I have no capacity to repay. My creditworthiness comes down quite substantially because now I'm not able to repay. My capacity drops considerably. And because you don't have access to my assets, you don't have any leverage over me. The only thing you have a leverage over me is, as an NBFC, that you can affect my CIBIL Report saying that this person took a loan from a person and then, you know, he didn't repay. And therefore, for the next time I apply for a loan, they'll say, well, you didn't repay that. So, your score has dropped, so we won't give you a loan. That's the only leverage they have.

But otherwise, what leverage do they have? What do you think of it from as a lender? Who is this person who's coming to a P2P player? If I have a house, I use that as collateral. I'll get a loan at seven percent. If I have a car, I'll get a loan at 10 percent. I can use my securities. Again, 10 percent, 11 percent, I can get a loan. Now when you come to a P2P kind of company, you've pretty much tried these avenues and exhausted them, or you don't have any collateral, or they won't want to give. They're giving you loans at maybe 12-13 percent. Now the P2P player says, I'll give you a loan at 15.

Deepak: Now the economics of it is in such a way that if the P2P player is doing all this work, collecting your information and all of that stuff, they are saying, listen, 15 percent will be charged to the borrower and then two percent will be kept by the P2P player, and 13 percent will go back to the lender. The borrower pays 15, and the lender gets 13. Now, if you look at this whole concept and say that the borrower is now paying 15 percent to come to something, this person has probably been rejected by the banks, rejected by NBFCs, does not have collateral. Possibly does not have great creditworthiness, either. And perhaps has a credit score, which is not that great. When you lend to such a person, naturally, your default rate has increased.

Each of these parameters, with no collateral, has increased the potential for a default rate. Now higher the interest rate that you're charging, the more likely you're getting a person who's more likely to default, which means if I charge 15 percent, my default rates are 10. At 20 percent, my default rate is not 15; my default rates are probably 18. So, my default rates increase more exponentially as the rates increase, and I don't have any collateral to show for it.

This is where the problem is of the two. If you find a bridge, the platform that can bridge the two, the gap between the two, and give you good information, that might be one of the ways to say, well, I know I'll participate. But you know what? Most of these loans, whether they're short term or the long term, they need to make you money in a longer period. Now you don't have the time. If you're typically a working professional who says, listen, I'm going to go through 100-150 sets of people for each loan. Because I'm giving thousand rupees per person, I have one and a half lakhs, I can’t go to through a hundred and fifty profiles.

So, you know what, you tell the platform, I'll give you a hundred and fifty thousand. You find an algorithm. I'll give you the parameters, give me Safe. That means somebody has a credit score of about six hundred out of 800, or out of 900 or whatever the number is, and you want scores as high as possible. But the minimum score I want to give it to is six hundred and then just give those people loans automatically. Now you've absolved yourself of the responsibility. You've the P2P platform a certain fee. You're paying them the difference between the borrowing rate and the lending rate to make these loans, and you assume the risk.

The problem here is if there is a default. Because you didn't make the selection yourself, you feel a little cheated because you say, listen, I thought you checked everything, and they say, well, we did because you didn't have the time, and I followed your parameters.

Shray: We did our best.

Deepak: Yes. We did our best. You feel more disappointed, and you say, well, you know what? Help me recover, at least. You know what? There's a legal charge of forty thousand rupees. Dude, but I gave this guy two thousand rupees. I am not going to spend forty thousand to collect two thousand. That's stupid. Like, well, that's what it costs. We must send a legal notice. But guess what? I have 40 other people who lent it. So instead of paying forty thousand rupees, you pay five hundred rupees.

Now you're thinking. To recover two thousand, I must pay five hundred rupees. And I don't even know if I can recover it because if this person has defaulted, most likely, he won't respond to a legal notice in the first place. This makes you disappointed, and says, listen, I have so much more money in the system. Are they going to do this for every single loan that defaults tomorrow? Is this the kind of stuff that happens when I default? And people aren't geared towards thinking, screw this. Forget it. I don't want it anymore. Now what is interesting about a platform like this is sometimes it can still help, and we come to that about why we should or why we shouldn't. But I think some part of this platform can be a form of charity.

Shray: I'll pause it there. One thing you said immediately struck me from a tax perspective. So just let me talk to you through this and tell me if you agree, I give you a loan, you pay me back for the first year. Now there's an interest and principal component, so I pay tax on that. But you're like, dude, I've got hit by a bus. I can't pay you back. I'm done. What about my loss? And can I get back the taxes that I've already paid?

Deepak: This is the elephant in the room, and you’ve hit it spot on because you're an individual. You're not a business.

Shray: Well, you can be right. It's P2P.

Deepak: So, because of this, since lending is not your business, the person who doesn't return the loan to you is not available to take the loss for you for whatever reason it is, apparently. And so, the issue with this is that for two years, I could have lent a hundred rupees, got 30 rupees as interest. In the third year, the guy defaults on the money, or only seventy percent of the money comes back. Yeah, he says, I have only 70. Take this.

Now you said, OK, what? 70 plus 30 as interest. That's fine. But guess what. The problem is, on the 30 profits, the interest that you made, you paid 10 as taxes. So, you left with only 20. Now it gives you back 70. 70 plus 20 is 90, and you're thinking, well, what happened to the remaining 10? The government took it, but the money that you lost, which was the 30-rupee principle that he couldn't repay, you cannot offset that back against the tax.

So, this is where it becomes horrible because you're in a position where if there are defaults, you can't offset the loss against the income you're making in the first place. So, I think that is where there's a serious issue with the P2P lending framework also. But let me come back to the other question you also asked, which was how these players who are...

Shray: Guaranteeing stuff or not? Sorry. No, that's not the word. Putting their best foot forward in trying to help you get your return.

Deepak: So, let me give you the thought process like this. You see this ad. A great start-up says, give me money for P2P lending. I have platform, a lot of people, very interesting guys, and all that. Some of them are even going IPO. But still. What happens over here is, if I give you money, why can't I give that person money?

Because for them to take money, there is something called a deposit. They can't take deposits as a company. The new Companies Act has a lot of curtails. They curtail taking deposits from the general public. The second thing is, if they take the money and lend it onwards, they must become a full-fledged NBFC.

I'll tell you why that works. Ok, so let's say you lend to a bank and the bank one-lends to somebody else. The bank takes the risk. When the bank takes the risk, the RBI says, listen, you're taking risk. So, I want a certain capital buffer. Yes, so for hundred rupees, you must have 10 rupees of your own money. If you're lending 500 rupees, you've got to have 50 rupees or 10 percent capital ratios. Disclosures on NPAS, this, that, everything, there is a lot of regulation. Now some of these start-ups don't want that regulation.

Shray: Becoming a bank isn't easy, right? NBFC also, you can either take deposits or give loans, you can't really do both.

Deepak: You can't take deposits. Deposit-taking NBFC licenses haven't been given over the last 10 years. So, therefore, doing something like this as a deposit-taking NBFC is not possible. What happens is, they say, let's do it through a quasi-framework. They say, well, I am big fat start-up, and therefore you give me money and I will make sure the money is lent. It is a P2P framework. So, I'm only keeping the money temporarily while I give the money over to somebody else who's borrowing on my platform. It's a P2P loan, but you know what, wink, nod, if something the other guy isn't able to repay, I will repay it.

Shray: Which I do believe, by the way…

Deepak: In a sense, yes, because I don't have any reason to do that. Why would you ruin the market by not doing that?

Shray: Why would a successful start-up who wants to create a great product not help you get your money?

Deepak: Yes. You know what? If I am an NBFC, I'm looking at this and saying, one second. I struggle. I must issue bonds. I must talk to banks to borrow money because I can't borrow from the retail public because you're not giving deposit-taking NBFC license. When I do this, then I can take the money and lend it to somebody else.

And whenever I lend it to somebody else, you say you must have capital adequacy ratio and whatnot. How come those rules doesn't apply to them because they are also offering a guarantee? Effectively, it's their balance sheet that secures the loans that they're giving, the deposits that they're taking. How come they don't get the same regulatory treatment, and RBI is going to be like, yes, of course. How are you guaranteeing these loans? I want to analyze and if you've ever used the word 'guarantee'…

Shray: No, I'm sure they haven't.

Deepak: I hope they haven't. But even the impression that this is a guarantee is a bad thing, according to me, for the whole space. Because there is no real guarantee, it's a quasi-guarantee. Then it becomes a Sahara. And Sahara was a big case where Sahara took all this money, little, little money from a lot of people. Said it's an investment. They went and bought real estate in all sorts of places. Very liquid. And when the time came to unwind all this stuff, they simply did not have the liquidity to do so, and they couldn't. There were no capital buffers and all that.

So, RBI and SEBI were unhappy about this because there were a lot of private individuals whose money was stuck in Sahara and all of these cases. And they said, well, you can't have this. You can't have a quasi-bank, quasi-borrowing institution, which is not regulated by RBI or SEBI. And you know, there was a lot of jail time for the promoters. And so, I think the new start-ups need to be cognizant of these rules. And while you might think that there is a guarantee, there's a risk that the regulator can come in tomorrow and say, you can't run this operation, even if there is a sniff of a guarantee. It will hit the fan at some point. So, I feel it's all good, in the start-up world, when they're raising so much money every month..

Shray: You know they will be able to. The loan books are tiny compared to the money they are raising.

Deepak: Yes. Yes. I don't think they will ever default.

Shray: But your point is that this is not a scalable operation, and then regulators will get involved because this is just not good for the system.

Deepak: And you know what, even the start-up will guarantee the first maybe thousand or 1500 crores. But they can't do this for thirty thousand crores. They don't have that kind of capital to guarantee it. So, at some point in time, they're going to be guaranteeing more than they can afford. And then things blow up.

Shray: Fair enough. I get the sentiment with which you said this. So, Deepak, this brings me to two questions then. Look, RBI won't let me make a recurring card payment on my card anymore, so why have they then enabled this industry and seem to be encouraging this industry in some case? And then your second point, which you had started to raise, but we didn't get to, which is then who should be here because you've got such a, I would say, frankly negative outlook on the whole thing that says this is a bit like a lottery. I mean, if you're one of the lucky people who get 20 percent, then good for you, but by and large, this has not been the super smooth, great experience for everyone. So, who should be coming to a lending platform either as a lender or a borrower? So, both questions why is the RBI encouraging the growth of this? I mean, what's the policy or whatever objective they have? And second, who are the right people who should be coming here?

Deepak: From our first question, which is RBI. RBI, I think must recognize or has recognized, the fact that RBI rules apply but you know what? People are going to lend money to each other anyhow. The difference is, I must know the person, I must take collateral. I'll be a money lender. I'll be usurious. I'll use bonded labour. Because that's the kind of people that do this on a money lending basis.

Now they said, listen, why should people do this? You know what? There's a village. There's a farmer in a village who must borrow from the local moneylender simply because there's no one else to borrow from.

The banks won't touch these people. They don't have enough documentation, and they can't speak the right language and they walk into a bank, and they're not treated well, and so on. So, at some point, there is a big problem in this ecosystem for them to be able to get money.

Now, me, Deepak Shenoy, sitting in Bangalore, looks at this and says, well, there are. You know what? There are farmers in Chhattisgarh who are suffering because of this, and it has been brought to my notice that they need only thirty thousand rupees for a crop. You know what? I have 30,000, so I can help 30 farmers with thousand rupees each, and I know 30 other people who can do the same thing. Why don't we get together and give these farmers one thousand rupees each per farmer, per person? And they’ll all have loans.

RBI says, well, you know what is a good thing because you know what? Banks and NBFCs are not doing their job. They're the ones who should have been lending to these people in the first place. They're not. And there's a person like Deepak Shenoy, who says I'm happy to help them.

Shray: That's a key word you've said, help.

Deepak: Yes. The issue is this. I look at this and say, listen, if I give the money as charity they're going to, they're going to feel offended because they'll be like, I'm not begging for money, right? At the same time, I don't feel that they should be paying 30 percent, 40 percent and, you know, having their children bonded to the money lenders. So, I am like, OK, let's do a much less usurious kind of a loan process and say, okay, maybe eight percent.

You know what? Worst case, don't pay me. I lose thirty thousand. I'm fine. You know, I'm out of the 30 farmers, maybe five default. I'll get back only twenty-five thousand rupees with some eight percent interest. It's still less than what I paid. But you know what? For me, that's like, OK, if I lost that money, it's no big deal. And some people have gotten helped, and maybe they have managed to get themselves a little bit out of poverty. And maybe the crop failed. So maybe 25 farmers out of the 30 didn't pay, and only five paid, I'm still okay because I'm like, this is a situation out of their control. At least now, they don't owe money lenders for the rest of their lives.

This is more an act of quasi-charity. And there are start-ups in India that are doing stuff like this, for example, Rangde.in. Where you can go and say, I want to help these farmers, and you can choose. I want to help them at a zero percent interest rate, or a five percent or a seven percent or a 10 percent. However, you choose to help, the P2P players, this Rangde.in, they kind of facilitate the loan. They make sure it gets across, and then they come back. So, I have been a personal participant. I mean, I don't even bother to go check later.

Shray: But what you're saying is it's not an asset class or an investment. I mean, this is almost a quasi-charity where you may make some of your money back. And if you get very lucky, you'll make money.

Deepak: Yes, but here is where it gets a little complicated. As long as it's this charity thing, it was good. What if it suddenly becomes an investment? Now I'll give you the example of microfinance.

You know, there are Kolar and Ramanagar, which are cities close to Bangalore, and they have specific mulberry silk that is grown in these places. They breed silkworms, which grow into cocoons and then the silk is extracted from the cocoons, and silk material is made. What happens when this process takes place is that if you look at the situation, it is that somebody must grow these silkworms into cocoons and breed them, and there are all sorts of things that must happen before they are processed. These are done by individual people. These individual people need money to breed those silkworms. They need loans. They took loans from microfinance.
Microfinance companies say this is great. You're breeding silkworms. Eventually, you want to earn money. So, you know what? You just need working capital, right, just to be able to breed them.

So why don't I give you money? Because what they were doing was borrowing from the factory owners which were processing those silkworms. I'll give an example of some of these loans. For instance, a fifty thousand rupees loan. You're supposed to repay it at ten thousand rupees per month. If you're not able to repay it, even if you repaid thirty thousand rupees, he charges your interest on the full fifty thousand. It's not reducing balances. Full balance.

So, they charge it, and then there's a non-payment penalty as well. So, it is extremely usurious, these loans. So now, the microfinance player said, you know, I won't give you that kind of usurious loans, but I'll give you 30 percent per year kind of usurious loans. A substantial step up. And you pay me back over a period of six months. All fine, first cycle. Everybody does this. Three other microfinance players enter the fray.

Shray: Seeing a business opportunity.

Deepak: Seeing a business opportunity. Because they say, great, this is microfinance. And you know what. What we are saying is, they all work together okay. They are a community. I lend money to this community. If anybody defaults, I shame them in a monthly meeting. And because of you, I'm going to penalize the whole group by adding one rupee fine for everyone. Then you feel miserable, and then you somehow find a way to pay it back.

This is an interesting model. It kind of starts to work. But what's important over here is that these other players want to get into the same communities that have been lent to by other microfinance companies. They say, you know what? Take a loan from me also. You can use it, you know, grow more silkworms. And the guy says you know what, my daughter's marriage is coming, and I don't have enough money. I was going to the moneylender to borrow money. But you know what? This guy wants to give me money to breed silkworms, but maybe I'll bring some more silkworms, but let me take the money and finish my daughter's marriage first. This is not a problem. This is naturally..

Shray: This is how life is.

Deepak: This is how life is.

Shray: And this is the second loan.

Deepak: Yes. Because there's money coming in, and they're pushing this money down your throat. They're literally asking you, isn't there any way you can use the money? And you know, you have ways to use the money. So, you kind of take it and you use it. And then now the time has come for repayment. You say, well, you know what? I have access to money. I'll go to the third NBFC microfinance company to take some money and pay it back. After some time, everybody has multiple loans. The microfinance guys haven't talked to each other, and you don't know how many loans each person has. And soon, you start to realize that everybody in this community is extremely over-leveraged.

And what happened in Kolar was that the entire community of these areas were growing silkworms. They started to feel the pinch and said, listen, from now on, every silkworm I breed, the money I get from it, I must pay as interest. I don't have any money left for myself because the interest rates are high and that, you know, I have been burdened by more loans. Plus, they're not very educated. Somebody comes and tells them, use this money, they feel like he's fine.

Shray: Well, in fairness, interest rates and compounding are very non-intuitive. So, half the time, I don't know what's going on either. I get what you mean..

Deepak: I mean, it's not easy for anybody to figure it out. And so, because of the partial mis-selling as well. What happened over there was that the community leaders in those specific areas said, you guys are getting overburdened because these people have given you more loans and forced them down your throat. Don't repay.

Shray: En masse.

Deepak: En masse. And it may have been triggered by maybe a suicide that happened, unfortunately, or by a suicide attempt that happened by some people and all that stuff. What happens because of this is suddenly almost everybody says, listen, I am not supposed to repay because our leaders have said, don't repay. We will not repay. It happened in Ramanagar and Kolar closer to Bangalore. But it happened in the entire state of Andhra, where the political establishment says, don't repay.

RBI was unhappy about that but coming back to what happened, in this case, was when you've got a system of extreme leveraging, and there is a propensity to say I won't repay. Now, what are you going to do? For instance, your idea was I'll call a community meeting and shame one person who defaulted. Now, are you going to shame 30 people?

Shray: Well, I don't think they'll end very well for you.

Deepak: You mean there is a threat of physical violence over here. But beyond that, everybody's going to laugh at you and say, What shame? We're all defaulters. We have been told not to return your money. Plus, it's your fault because you pushed these loans down our throats. Now think of this happening in P2P as well. It may not be the same way, but you create a situation where at the extreme, there are defaults, and the defaults are en masse. So, you go to a village where you've done a loan. The crop has failed the entire village because guess what? There were unseasonal rains that suddenly happened. And in that sudden rain, everybody's crop got wiped off. What are you going to do? You can't go to them and say, give me back my money.

A typical microfinance company will be like, listen, guys, I'll give you another year. Don't worry. But microfinance company is a company.

Shray: So, they have that ability.

Deepak: Now you've got loans from 40 or 50 or 100 people. Are you going to get each one of those hundred people to say, it's OK, we can wait another year. And now it's difficult because one of those hundred will be like, no, I don't want to wait another year. I don't care. You please recover. Send a legal notice. This becomes a problem in the P2P framework, where when there is a default, and especially if the default is systemic in nature, in a sense it is not just one individual, but it is affected the community.

You've created a situation where the people cannot return their money, and the borrowers are not organized enough to make a collective decision to give a concession to the borrower.

So, this is where I think you may have a problem. You should be careful about what your objective is. And if your objective was to make it an investment, then it's a lot more work. It's a business by itself. And worse thing is you can't even create a business out of it. If you can make it a company, then P2P is not even allowed as a company. So, you're finished.

Shray: And that's when you could have claimed the loss.

Deepak: Yes. That’s when you should have claimed the loss. It's really unfortunate.

Shray: Actually, you've hit on that point you were saying about over lending reminded me of the U.S. financial crisis. A lot of loans were given, chasing yield or just because expanding balance sheets and what not.

Deepak: I mean, ninjas at that time, no income, job, or asset. And they were getting loans.

Shray: And you could take a double or a second mortgage or a double or triple mortgage on the house…

Deepak: The same house. You know what? In India, also, you've had situations where usurious loans made by apps apparently owned by Chinese people who created these businesses…

Shray: We've seen this first-hand. I mean, and we've seen the apps get recycled. One lakh debt, it became like four lakhs in a month.

Deepak: Yes.

Shray: And then, at this point, it was like we didn't know what to do.

Deepak: And you know what, we talked to the person, and they said they want to repay. Even though it was a usurious loan. We said, don't repay. Default voluntarily on this because this is just nonsense. They wanted to borrow money to be able to repay that loan because they didn't want that feeling that they had not repaid a loan on their chest.

Shray: So, this is really complicated because if you look at it, I mean, where I was originally going with this conversation is, say, banks and NBFCs - existing players, have not lent enough, so we need more players out there to expand the lending. But then you've also pointed out when you expand lending, sometimes there's over lending, and then there's over-borrowing. To be honest, loans just sound like a very, very hard business for everyone involved.

Deepak: So, I think in general, any company that makes a loan must have a mentality that says some of these loans are going to go bad by design, by nature. Humans as individuals, especially a lot of people in India that I've seen, are not built to handle a thought process like this. If you buy 50 plots of land. One of them gets encroached by somebody else. One out of 50. My thought process over here is let it go. It doesn't matter, you have another forty-nine.

Shray: you’ll make enough money on that.

Deepak: I mean going there, dealing with maybe some unsavory elements, may not even be worth the time you spent on it. It may be a far-off thing and all this stuff. And look at the context of P2P lending. You have maybe a thousand rupees per person. You must be able to make enough loans and say, you know what, one or two thousand I will lose. Now a lot of people don't have this. I'm not saying 100 percent, but let's say 80 percent of the people that I know who want to make money do not want to take these losses.

Shray: They will not take this probability-based thing.

Deepak: They're like every rupee they lose, it stings. At least, I should have tried to recover this money. And you know what? It's more effort to recover a thousand rupees than it looks. And, you know, although the person on the other side may be laughing and saying, I took your thousand, I didn't give it back to you. What can you do about it?

You're like, I choose not to do anything about it because that's not my business model at all. Because most people are honest and you're one of the few dishonest people. I just try and find a way to avoid you in the future. People just don't have that thought process in their mind. That's one of the reasons why P2P lenders, that means people like me who want to, who have enough money, who want to put money in trust frameworks, will find it difficult to deal with the complexity and the high default rates of such kind of ventures.

The lenders on the other side are fine. Because I'll tell you why they're doing this is because they can earn the spread without having any of their own capital at risk, and that spread is two percent out of nothing.

Deepak: Now, you know, in effect, it's a good business if the business model itself was sound. But these P2P platforms are like this. They go into the lenders saying, don't worry, these people won't default. They're going to the borrowers and saying, listen, come here, you're not getting a loan anywhere else. I'll find people to give you the loans.

So, you're encouraging lousy thought processes from both sides rather than going to the lenders and saying if you lend here, you might be doing a favor to this community, which I think is a good way to kind of address it. The other thought process that I can think of - a friend told me about this model that was running in Guwahati, where they went to a shopkeeper and they lent them one lakh rupees for working capital and every day for a year, they told them, we will come every day. You ought to give us back 500 rupees. Now the math here is ridiculous because you're returning 500 rupees a day…

Shray: You're paying off principal every day.

Deepak: And then the rule of thumb is that if you pay for 11 months, the twelfth month is free. So, everybody wants to pay for those 11 months. You think of it, 11 months is about 330 days. 330 days to 500 is one point six five lakhs. So, if I give a loan of one lakh and I'm getting one point six. And that too, not all of it at the end. Every day, I'm getting 500 hundred rupees.

Shray: You're making a very high return.

Deepak: Like 150+ % return. That, is the return that makes a lot of sense to continuously have as a microfinance platform. And unfortunately, of course, it may not be allowed in microfinance.

Shray: I don't think not, right!

Deepak: But I mean, I think that's what makes sense because you know what, at 100 percent interest rate, APR, the default rates can be as high as 30. It's OK. For instance, only if I have a 50 percent default rate, there's one hundred percent break even. So as long as my default rates are high, I should be able to charge a much higher loan. So, I must package it in a way that doesn't look very high, but five hundred rupees per day for a loan that's one lakh rupee upfront sounds like ‘Acha, theek hai, reasonable hai.’

Shray: Well, I must be honest, it does sound reasonably compelling to me because you're discharging some of your obligations every day, but I know how the math works. That said, it might be, in a sense, a very safe method for me to be able to repay my loan.

Deepak: It might. Many of these shopkeepers have the cash, and they prefer to pay every day. For instance, you collect the cash on the day and then the one guy comes to your shop at the end of the day and says, ‘Sir, my 500? You give him a 500 rupee note, and then you're done. So as long as you're in this process of continuously repaying that money every day, you don't feel the pinch and you have got the capital to finance your shop in the first place.

Shray: Yeah, you did pay whatever 100 plus percent, but I vaguely understand what you mean. But so, in a sense, what I'm hearing from you is that there's two use cases that really would thrive under new and innovative lending frameworks. There's an extremely high interest rate in these interesting models. And then there's the quasi-charity kind of one. But in the middle, it's difficult. And that's what I hear.

Deepak: Yeah, because in the middle you are sitting, and you know what, six percent won't excite you, seven percent is not going to excite you. Anything above seven, you're getting the guy who does not have collateral or does not have this. So, it's a hit and a miss, and your thought process is always like, I hate to lose money and now you're always going to be under this misery of, listen, if I had maybe filed a police complaint, if I had sent a lawyer's notice, maybe I would've got back some of that money.

That thing is just like, I mean, why would you do something that makes you hate yourself at night? At best, you should think of it as charity and invest so much amount that you're completely willing to lose a hundred percent. And give it for charitable purposes. Give it to people who are in such bad shape, they can't afford anything else. I think that makes sense.

Shray: So, Deepak, thank you very much for that. That's a very sobering take on P2P lending, and let's see how the ecosystem evolves because the players in this space, they're well-funded. They're certainly very thoughtful about it. So, let's see what they do next.

So, I'm willing to wrap it up. Thanks so much, everyone for listening. Thank you, Deepak. If you want to listen to more episodes, go to Capitalmind.in/podcast.

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Deepak: Thanks, Shray. This was awesome and thanks everyone for listening in. Looking forward to great new episodes, a lot of new stuff. Please get in touch and have a happy festive season.