Online Lending 101

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e-Platform that enables financial activity

related transactions in a secure,

transparent environment between two

or more entities that would not normally

connect with each other in the physical

world.



• Funds Transfer

• Bill Payment

• e-Wallet

• Online Lending

• Crowd Funding

• Wealth Management

• Personal Financial Advisory Services

• Call Money Market for SMEs



FinTech entity that facilitates loaning

activity related transactions – financial as

well as non-financial – between two or

more interested parties.

A Lending Platform (LP) entity is primarily a

technical services provider and not a

finance company.



• Personal Finance

• Personal Loans

• Vehicle Loans

• White Goods Loans

• Home Loans

• Monetization of Assets

• Business Finance

• Vehicle Loans for Transport Operators

• Tools, Equipment & Furniture Finance for MSMEs

• Machinery & Equipment Finance for SMEs



Loan products are designed with a set of attributes: Qualifiers

Attributes that define the target market segments

Risk Factors Attributes that expose the lender to probable credit default and hence used to fix interest rate/interest rate range

Enablers Attributes deemed acceptable as counters to risk factors

Credit Terms Ranges for loan amount, repayment period and interest rate; installment type, interest method, repayment default management policy etc.

Institutional lenders, almost invariably, offer distinctly

designed products. LP entity should implement a system which supports multiple sets of product designs that can be

linked to a specific lender-type/lender.



Registration of Applicant

Registration of Lender

Registration of Approved Vendor

Receipt of Credit Request

Preapproval of Credit Request

Release/Notify/Auction of Preapproved Credit Requests

Sharing Credit Offers with Applicant

Loan Documentation

Loan Disbursal

Post-Disbursal Documentation

LMS Activities



Preapproval of credit requests involves four major sub-processes:

Prequalification Data values culled from the credit requests are validated against the preset values/value-ranges of Qualifiers

Verification Statements made in the credit requests and the supporting documents are verified in online, back-office offline and/or field visit modes

Default Risk Analysis Credit scores retrieved from credit rating agency databases and values assigned to other Risk Factors are analyzed to work out probable default risk

Enabler values, if any, are applied on probable default risk compute Composite Credit Score

(contd…)



Default Risk Analysis (contd…) Composite Credit Score is used to find out appropriate interest rate/interest rate range for the desired loan.

Credit Appraisal Amortization schedules are prepared for the desired loan amount and loan period using appropriate interest rate/interest rate range, interest methods and interest policies to calculate projected repayment obligations.

Repayment capacity of the applicant after adjusting the average income for existing repayment obligations and lender-specified margin-tolerances is validated against projected repayment obligations to take the final credit decision.

A well-designed Preapproval process may very well process a single credit request differently for different institutional

lenders.



• Online Disbursals

• Online Repayments

• Multi-Disbursal Loans

• Running Credit Limits

• P2P Loans

• SME Finance

• Vehicle Loans

• Micro-Credits

• Use of Social Media

• Blockchain Implementation

• Offline Processes & Turn-Around-Time



A LP bereft of online disbursal functionality will merely be an Online Loan Origination System maintained & operated by a 3rd Party.

Since no Loan Origination Fee can be charged before actual disbursal that would happen externally, revenue stream for

such LP entity can only include:

1. Member Registration Fees 2. Credit Application Fees

Since the LP entity would still have to run a comprehensive preapproval process, revenue generated will be insufficient to cover the bare minimum running expenses rendering the operations economically unviable.



Online lenders would a LP entity to explicitly or implicitly stand in as a default guarantor for the borrowers. LP as the service provider also runs a very real risk of being dragged in legal disputes in case of repayment defaults. Therefore,

the LP entity needs to be actively involved in the recovery process to safeguard its own interests.

A P2P lender is much more likely to choose a LP entity that dynamically monitors recoveries on his/her behalf.

LP entity can further increase its revenues by charging

1. Transaction Fees from borrowers 2. Loan Management Fees from lenders



Multi-disbursal loan facilities require release of sanctioned loan amount in multiple tranches on achievement of pre-defined milestones. Home Loan for construction of a house property is one example.

In such cases there are two primary considerations:

1. Verification of actual achievement of the defined milestone

2. Ready availability of funds to facilitate release of the tranche amount on successful verification

Such milestone verification will most often involve some offline field visits.

Unless the LP entity itself is a finance company ensuring availability of requisite funds at the proper time may not be feasible without maintaining some escrow account.



P2P (Peer-to-Peer) loans thru LP represent virtual

democratization of lending marketplace as it enables even

non-institutional lenders to invest their surplus funds in a

structured loaning program.

In order to set up a complete ecosystem of pure P2P loans

from scratch two contradictory factors need to be

reconciled:

1. Individual borrowers would like to register with a LP entity

only if they are reasonably certain of quick credit decisions

because of availability of sizable community of lenders.

2. Individual lenders on the other hand would like to register

with a LP entity already popular with potential borrowers.



Financial projections for any structured lending program are

always created assuming some credit defaults. The average

default rates usually assumed are based on historical data

of traditional BFS advances made to low-risk clientele.

Majority of LP borrowers will instead be moderately

medium-risk. Defaults in P2P space need not be reported to

any credit rating agency removing any risk for defaulters of

damage to credit ratings. These factors taken together

indicate a much higher default risk.

A LP entity, therefore, must assume a higher than historical

default rates for its projections.



The recent brouhaha about atmospheric pollution in Delhi has brought the problem of vehicular pollution in sharp focus. Supreme Court is pushing for advancing the deadlines for implementation of BS-VI norms to 2019-20. GoI has already started talking to automobile manufacturers in this context.

By all indications, just in a couple of years people in metros & bigger cities (if not all over India) will be forced to upgrade to newer set of wheels - be it for personal transportation, public transport or public carriage. A large majority of them will have to raise finance for the purpose.

LP entity that supports vehicle loans can enable tier -3/4 banks, smaller NBFCs and HNIs to profitably participate in

the loaning activity.



Unlike personal loans, a Vehicle Loan is secured by a tangible security that can be re-possessed and sold to recover dues.

Vehicle Loans may be additionally secured by third-party guarantees and/or mortgage of property for even lower default risks.

LP design can easily support daily or weekly repayment schedules further lowering default risks even more.

Empanelling approved dealers, distributers & fabricators of vehicles will not only lead to significantly improved turn-around-time (TAT), it may also set up another revenue stream.



In general social media platforms are exploited only for business promotion and sales efforts.

In case of LP entity, though these channels can also be used for improving the quality of credit decision and reducing credit default rates also:

1. Careful analysis of social media profiles of credit applicants during preapproval stage may lead to discovering additional relevant information not normally revealed in preformatted credit request forms.

2. Post-disbursal engagement with borrowers continued over social media should help in detecting incipient signs of potential repayment default and ensuring traceability of defaulters.

3. Fear of embarrassment on disclosure of credit defaults on social media may just be a major incentive to avoid defaults.



Online Lending 101

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