The Economic Times daily newspaper is available online now.

    Working in tandem: The new and the old way of banking

    Synopsis

    Is the balance of power shifting from the traditional way of lending to a new model based on market-based supply and demand of credit?

    iStock-915586882FINALGetty Images
    P2P platforms are not merely displacing the incumbent lending system driven by banks but filing the gap in an under-served credit market and effectively contributing to improving financial inclusion.
    By Rajat Gandhi

    Last week, Yes Bank’s shares increased by 13.5% after reports that Indian digital payments network Paytm’s parent company One97 Communications Pvt Ltd, may buy out a 9.6% stake from Rana Kapoor, Yes Bank’s co-founder.

    The fact that a new age fintech company is coming to the rescue of a traditional banking model, and this news is being cheered by the stock market is being considered by many as a reflection of things to come. I am often asked whether fintech will replace traditional banking and I have always maintained that neither fintech nor banking institutions can distance themselves from each other.

    They must approach each other not as competitors, but as an opportunity. Collaboration and cooperation between fintech firms and traditional financial institutions is an indicator of the symbiotic relationship between the two categories. While fintech firms – irrespective of whether they are lending, or payment aggregators – need the infrastructural support of legacy banking systems, banks need to adapt to the emerging fintech models to tap in the wider pool of digital-savvy users and tech-enabled financial services.

    The role of fintech companies like ours is not just competitive, but also complimentary. The most successful fintech companies are those that are offering easy investing or better access to funds, supporting small businesses. One of the core competences of P2P lending has been its ability to model underwriting mechanism driven by technology that can serve niche or underserved segments. So, the idea is not to replace banks, but to address areas that banks find difficult to serve due to cost or risk, such as SME/MSME lending or unsecured personal loans.

    P2P lending has proved to be a boon for small businesses struggling for capital to manage day-to-day business operations. Online lenders leverage modern technology to remove friction from the lending process, providing more flexible payment terms and conditions, which is desirable for many small businesses. Over the last few months we have launched many loans customized to the requirement of this segment such as line of credit, weekend and daily loans. Also, small-business owners are increasingly considering online lenders as we offer faster credit at reduced costs.

    Thus, P2P platforms are not merely displacing the incumbent lending system driven by banks but filing the gap in an under-served credit market and effectively contributing to improving financial inclusion.

    On the supply side, P2P lending has managed to unlock alternative credit supply easing the pressure on banks and FIs. It is also breaking down financial borders – creating an environment where every individual can be a bank. Not only do individuals earn returns by lending out their surplus money, there is the personal satisfaction of helping fellow humans in need.

    By bringing into the economic mainstream, funds otherwise lying idle in lockers or in dead investments, P2P lending has created an investment opportunity that can deliver high and stable returns to investors and ease out credit supply. This can go a long way is reviving a fragile Indian economy battered by a huge credit gap and struggling from liquidity crisis.

    Is the balance of power shifting from the traditional way of lending to a new model based on market-based supply and demand of credit? Time will tell. But what can be ascertained is that a marriage between the old and the new of the banking industry might just be the way to move forward.
    (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
    SIDBI MSME Conclave 2024 |Register Now.
    ...more
    SIDBI MSME Conclave 2024 |Register Now.
    ...more
    The Economic Times

    Stories you might be interested in