CASE STUDY 1 – FAIRCENT: POWERING P2P LENDING REVOLUTION

Questions (handwritten and scanned pdf copy should be submitted)

Q1. Is P2P lending a winner-takes -all market?

No, P2P lending is not a winner-takes-all market. While there may be some platforms
that dominate the market, there is still room for competition and for multiple players
to thrive.

One reason why P2P lending is not a winner-takes-all market is because there are
different niches and segments within the industry. For example, some platforms may
focus on small business loans, while others specialize in personal loans. This allows
for a diverse range of players to compete and serve different markets.

Furthermore, P2P lending is still a relatively new industry and is constantly evolving.
As the industry matures and expands, there will likely be opportunities for new
players to enter and disrupt the market. Additionally, there may be regulatory
changes or advancements in technology that create new opportunities for
competition.

It's also important to note that P2P lending platforms rely on a network of borrowers
and lenders, and the success of the platform depends on maintaining a balance
between the two groups. Therefore, even if a platform is dominant, there is still a
need to attract and retain borrowers and lenders to ensure the platform's success.

Faircent is one of the leading P2P lending platforms in India, but it has not yet
achieved dominant market share in the Indian P2P lending industry. Therefore, it
would be inaccurate to say that P2P lending is a winner-takes-all market in India,
even when considering Faircent.

The Indian P2P lending market is still in its early stages and has a lot of room for
growth. While Faircent has been successful in attracting borrowers and lenders to its
platform, there are still a number of other active players in the market. According to
a report by PwC, there were over 30 P2P lending platforms operating in India as of
2020.

Furthermore, the success of a P2P lending platform depends on its ability to maintain
a balance between the interests of borrowers and lenders. Therefore, even if a
platform like Faircent is successful in attracting a large number of borrowers and
lenders, it will still need to work to maintain their satisfaction and retain their
business.

Overall, while Faircent has had success in the Indian P2P lending market, it is not a
winner-takes-all market, and there is still room for competition and growth.
Q2. What additional measures are required to increase investor confidence in the P2P lending
system which can potentially help in reducing the cost of capital too?

There are several measures that could increase investor confidence in P2P lending
and potentially help reduce the cost of capital:

1. Enhance transparency: P2P lending platforms can increase transparency by

providing detailed information about borrower risk profiles, loan terms, and
past performance. This can help investors make more informed decisions and
reduce the risk of default.
2. Improve underwriting standards: P2P lending platforms can improve their
underwriting standards by using advanced data analytics and credit scoring
models to assess borrower creditworthiness. This can help reduce the risk of
default and increase investor confidence.
3. Increase regulatory oversight: Regulators can play a role in increasing investor
confidence by imposing stricter regulations on P2P lending platforms. This can
help reduce the risk of fraud and ensure that platforms are operating in a fair
and transparent manner.
4. Enhance risk management: P2P lending platforms can enhance their risk
management processes by diversifying their loan portfolios across different
sectors and geographic regions. This can help reduce the risk of default and
increase investor confidence.
5. Develop a secondary market: The development of a secondary market for P2P
loans can provide investors with greater liquidity and increase the
attractiveness of P2P lending as an investment asset class. This could help
reduce the cost of capital for borrowers.

Overall, increasing investor confidence in the P2P lending system will require a
combination of regulatory, technological, and operational improvements. By
addressing these issues, P2P lending platforms can attract more investors and
potentially help reduce the cost of capital for borrowers.

Q3. How Faircent has performed during the COVID crisis? Would any form of
diversification of services offered on the marketplace help reduce the risks of a financial
crisis such as Covid or similar financial distress situation?

Faircent, like many other P2P lending platforms, faced some challenges during the
COVID-19 crisis. The pandemic resulted in increased economic uncertainty and
reduced demand for credit, which led to a decline in loan origination volumes for
many P2P lending platforms, including Faircent. However, Faircent has taken several
measures to mitigate the impact of the crisis and ensure the safety of its investors
and borrowers.
One of the key measures taken by Faircent during the COVID-19 crisis was to tighten
its underwriting standards and focus on low-risk borrowers with a strong credit
history. This helped reduce the risk of default and protect the interests of its
investors. Faircent also provided a moratorium to its borrowers who were facing
financial difficulties due to the pandemic, which helped them manage their cash
flows and avoid default.

In terms of diversification of services, Faircent has already diversified its loan portfolio
across different sectors and geographies to reduce the risk of concentration. It has
also introduced new loan products, such as personal loans and education loans, to
cater to a wider range of borrowers. However, the COVID-19 crisis highlighted the
need for further diversification of services and the introduction of new products that
are more resilient to economic shocks.

One potential way to reduce the risks of a financial crisis such as COVID-19 is to
introduce new investment products that are more diversified and less correlated with
the broader economy. For example, Faircent could explore the introduction of
investment products that are backed by collateral or have a higher degree of
liquidity. This could help reduce the risk of default and increase the attractiveness of
P2P lending as an investment asset class during times of economic uncertainty.

Overall, while Faircent faced some challenges during the COVID-19 crisis, it has taken
several measures to mitigate the impact of the crisis and protect the interests of its
investors and borrowers. The diversification of services offered on the marketplace
could further help reduce the risks of a financial crisis and increase the resilience of
the P2P lending industry.

Q4. What are the envelopment risks faced by Faircent given the presence of large commercial
banks and NBFCs who are fast leveraging technology to strengthen their consumer reach and
create an alternate banking channel?

Faircent faces significant envelopment risks from large commercial banks and Non-
Banking Financial Companies (NBFCs) who are leveraging technology to create an
alternate banking channel and increase their reach to consumers.

Large commercial banks and NBFCs have several advantages over P2P lending
platforms like Faircent, including greater financial resources, established brand
recognition, and a larger customer base. They also have access to cheaper sources of
funding, which allows them to offer lower interest rates to borrowers.

In addition, large commercial banks and NBFCs have been quick to adopt new
technologies and digital platforms to enhance their lending operations and create a
more seamless user experience for borrowers. This has helped them increase their
reach and offer more competitive loan products.
To mitigate these envelopment risks, Faircent needs to focus on its core strengths,
such as providing a more personalized and flexible lending experience, leveraging its
network of individual lenders to offer more competitive interest rates to borrowers,
and maintaining its commitment to transparency and underwriting standards.

Faircent can also explore partnerships with banks and NBFCs to leverage their
distribution channels and reach a larger customer base. This could help Faircent
expand its lending operations and provide a more comprehensive suite of loan
products to its customers.

In addition, Faircent can continue to invest in technology and data analytics to

enhance its underwriting standards and provide a more seamless user experience for
borrowers and lenders. By staying focused on its core strengths and continuously
improving its operations, Faircent can remain competitive and avoid being
enveloped by larger players in the market.