August 31, 2018
While crowdfunding is relatively new to India, it can facilitate the rise of many more start-ups who are unable to access other prominent funding options
A start-up venture in its budding stages is hungry for resources, most of all money. Bank funding is not viable in a lot of cases for reasons that include lack of requisite financial background and/or collateral, relatively poor credit scores and high interest rates. Moreover while other sources like VCs and angel funds have fuelled many a start-up dream, there are several more that do not fit into their strategic roadmap.
Crowd funding, on the other hand, opens up the range of options in a big way. It is defined by Investopedia as "the use of small amounts of capital from a large number of individuals to finance a new business venture". While the concept is not new, it has seen an obvious surge in recent times with the proliferation of the internet and social media. A developing country like India, especially with its huge social media base (largest market for Facebook with 270 million users as of July 2018), can certainly look forward to crowd funding playing an increasingly important role in the start-up ecosystem. Crowd funding is perhaps aptly defined as the 'democratisation of the startup funding ecosystem'.
A World Bank Report on the potential of crowd funding for the developing world in 2013 estimated a total of 344 million households in the developing world with an income of "at least US$10,000 a year, and at least three months of savings or three months savings in equity holdings". The institution further projected that these households could build up to US$ 96 billion a year in crowd funding investments.
Crowdfunding can take various forms - it could be reward-based (seed crowdfunding where investors are looking for some kind of reward), equity-based (where investors get shares), P2P lending or lending for community initiatives (donations-based crowdfunding). Equity-based crowdfunding does not have legal sanction in India so far, but P2P lending has emerged as a viable option in the recent past.
Under debt-based crowdfunding, entrepreneurs can access easier repayment options compared to banks, explore a large resource base for potential investors interested in their business idea and even gain popularity before the launch of the idea. Small lenders in turn also stand to get better returns, the ability to spread their risk and also to benefit from the due diligence of the creditworthiness of potential borrowers undertaken by the P2P platform. The platforms themselves only provide a 'credit marketplace' and do not lend themselves. Faircent.com is India's largest P2P lending platform as on date with 40,000 registered lenders, 3.5 lakh registered borrowers, and 6,000 loans processed as of May 2018.
P2P lending in India is projected to reach a size of around US$ 4-5 billion by 2023. In October 2017, the RBI released its guidelines for NBFCs operating peer-to-peer lending platforms. The guidelines state that any NBFC looking to open a P2P lending platform will have to be registered with RBI, and it should have net owned funds of at least Rs 2 crore. Aggregate exposure of a lender to all borrowers and aggregate exposure of a borrower to all lenders have each been capped at Rs 10 lakh, while exposure of a single lender to a single borrower across all P2P platforms has been limited to Rs 50,000 while the loan repayment period has been restricted to a maximum of 36 months. The guidelines are viewed as positive, as they will attract more players into the fold and help grow the P2P lending industry manifold in India.
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