Everything You Need To Know About P2P Lending

By | December 6, 2018

P2P lending platforms offer a novel way for savers to earn higher interest rates by lending their money instead of saving. Here’s everything that you need to know about them.

Everything You Need To Know About P2P Lending

If you’re a regular reader of our blog, by now you must be perfectly aware that an ideal portfolio should be a combination of both traditional investments like Fixed Deposits, PPF etc. as well as riskier investments like Mutual Funds.

The portfolio distribution would depend entirely upon your risk appetite. Individuals with a higher risk appetite could opt for an 80-20 split of their risky and conservative investments respectively whereas conservative investors could opt for the reverse (80%-conservative investments, 20%-risky investments). While squirreling away some portion of your monthly income into savings is a must, there’s nothing prudent about parking all your savings in a Savings Account that doesn’t yield more than 4-5% per annum.

Peer-to-peer lending platforms, or P2P platforms as they are better known, have gained ground in recent years for borrowers who find it difficult to get loans sanctioned from traditional financial institutions. Let’s find out more about them.

Additional Reading: Looking For Investment Options? Try These Small Savings Schemes

What is P2P lending?

P2P lending follows a crowd-funding model where borrowers who need loans raise them from people who want to invest. This form of lending is largely carried out online and helps individuals who otherwise find it hard to be approved for credit from traditional financial institutions.

P2P lending also doesn’t involve any intermediary financial institution as borrowers and lenders deal with each other directly. The concept of P2P lending has gained a lot of traction in recent years, especially among individuals who want to earn higher interest rates by lending their money instead of parking it in their Savings Accounts and among borrowers who get comparatively lower interest rates.

Additional Reading: 8 Important Questions To Ask Before Lending To A friend

How do P2P lending platforms operate in India?

Borrowers are either individuals or small businesses and before participating in any borrowing/lending activity on the P2P platform, both borrowers and lenders have to register themselves. Following the registration, a thorough due diligence is carried out by the platform before any borrowing/lending activity begins.

In India, P2P platforms are mostly tech companies that are registered under the Companies Act. Largely, companies follow a reverse auction model where the lenders bid for a borrower’s proposal and the borrower has the option to accept or reject an offer. In most cases, platforms mediate all activities between a lender and a borrower. Some of them even offer additional services like credit assessment, recovery etc.

Additional Reading: What Is Marginal Cost Of Funds Based Lending Rate?

Documentation and due diligence:

P2P platforms in India at present, operate under low regulatory restrictions as they merely act as intermediaries between borrowers, lenders, and the partner bank. They also facilitate exchange of documentation between borrowers and lenders.

These platforms, however, do not take the money but they do facilitate collection of post-dated cheques from the borrower in the name of the lender as a proxy for repayment of the loan. The platforms also help in loan recovery and follow up with borrowers for repayments, if need be.

Regulations governing P2P lending in India:

The RBI came out with a set of regulations governing P2P lending in India in October 2017 and one of its key mandates was that peer-to-peer lenders need to register with the RBI. According to RBI data available until June 30, 2018, only five lenders are registered in the ‘NBFC-P2P’ category:

  • Fairassets Technologies India Pvt. Ltd.
  • Fincquare Fintech Pvt. Ltd.
  • Bridge Fintech Solutions Pvt. Ltd.
  • Bigwin Infotech Pvt. Ltd.
  • OHMY Technologies Pvt. Ltd.

According to industry experts, the number of players operating in this segment is believed to be much larger than the number of entities registered. But with these new regulations coming into force, the number of such companies will fall drastically.

One requirement that has weeded out smaller players is the requirement to have net owned funds of at least Rs. 2 crores. As registered NBFCs, these platforms also have access to data from credit bureaus that they can use to run a credit check of borrowers like checking their Credit Score and target those who match the risk profile that they are targeting.

Additional Reading: 3 Simple Ways To Improve Your Credit Score Before The End Of 2018

Is P2P lending for you?

Although there are considerable risks involved, one of them having your money held up for more than a few years, you also stand to gain a higher rate of return from these investments. Since you would be lending to those who need to borrow, a timescale of 1-5 years would be the norm.

Some platforms even offer the option of withdrawing your funds but there may be penalties levied in such cases. It’s best to avoid taking such a step as you may miss out on great return rates.

Not sure if you have the risk appetite for P2P lending? We have investments designed for all kinds of risk appetites and financial goals. Take a look?

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