The Peer-to-Peer Lending Revolution, Your Investments, And Alternatives

Introduction

The increasing penetration of non-banking financial companies (NBFCs) in India has resulted in a lending revolution. People can bypass banks and meet their financial needs using NBFC products. The new age of lending, a prominent alternative investment, is peer-to-peer (P2P) lending, which allows one to get direct loans from investors bypassing the banking system. 

Peer-to-Peer Lending And Its Impact On The Lending Industry

People approach banks and NBFCs to get loans for their financial needs. The credit appraisal team reviews loan applications, and they may be rejected due to various reasons such as insufficient income to meet the repayments, poor credit history and CIBIL score, lack of documentation, etc. Peer-to-peer lending platforms provide an alternative solution for those who cannot get loans through traditional means, bringing financial inclusion.

As per a report by IndustryARC, a market research and analytics firm, the peer-to-peer lending market is growing and expected to reach $10.5 billion by 2026 as more risk-averse investors want to diversify their portfolios. The factors contributing to the growth trajectory of P2P lending are:

• Faster loan processing
• Complete process is online
• Transparent lending principles
• Minimal documentation
• Fewer credit regulations compared to banks
• Minimal chances of fraud due to the adoption of blockchain and innovative contract technology

Working Of P2P Lending

P2P lending platforms connect borrowers with lenders at a particular convenience or platform fees. Like traditional loans, borrowers pay the interest and investors (who come together to lend money) earn interest.

Each platform has its own criteria for assessing the creditworthiness of the applicant. Interest rates for the borrower are determined based on their credit assessment. Investors can choose where to invest their money based on the risk profile and select the returns they want to earn. The Reserve Bank of India (RBI) regulates these platforms to ensure that there are no fraudulent activities.

The P2P platforms in India use multiple data points, including financial, personal, and social data points, to evaluate borrower risk. This risk profile is readily shared with investors so that they can determine whether they can lend to a borrower. Using the platform, investors can diversify their investments and lend to multiple borrowers, while the P2P platform handles all the loan processing.

P2P lending is a high-risk, high-reward investment tool. Investors lend money to businesses or individuals without a good credit score or collateral. An investor can mitigate this risk by choosing a platform with stringent screening criteria.

Role Of Online Platforms In Facilitating P2P Lending

P2P lending is gaining popularity amongst those seeking unsecured loans. Digital P2P lending has 97% of the market share in the P2P lending market¹. While the online platform facilitates connectivity, one must recognise the risks involved. Currently, P2P lending in India is nascent and needs regulatory compliance.

As per the RBI, any entity willing to act as a P2P lending platform must fulfil the following requirements:

• Start-ups must register as NBFC-P2P as per the Companies Act 2013 before launching operations. Such a company must show proof of owned funds of at least INR 2 crores.
• Existing NBFCs must also get peer-to-peer lending registration to start P2P operations.
• NBFC-P2P should only act as an intermediary between lenders and borrowers.
• Individual lenders can lend a maximum of INR 50 lacs across all P2P platforms.
• Lenders investing over INR 10 lacs should produce a minimum net worth certificate from a chartered account.
• Borrowers can borrow a maximum of INR 10 lacs across all P2P platforms.
• A single lender can only lend a maximum of INR 50,000 on P2P platforms to a single borrower.  

These checks protect a lender’s capital in an unsecured loan granting setup.

Benefits Of Peer-to-Peer Lending For Investors

P2P lending offers ample diversification and provides the following benefits:

• Easy And Hassle-free– P2P lending platforms deal with all paperwork for loan processing, disbursal, and recovery, allowing investors without the expertise to manage their investments passively.
• Higher Returns– Depending on the P2P platform, one can get average returns of 12%  based on the borrower's risk profile.
• Easily Accessible And Flexible- It is ideal for retail investors who can invest lower capital at these P2P platforms.
• Hyper Diversification– Investors can choose types of loans, such as short-term or long-term loans, personal or business loans, etc., based on their investment goals and risk profile.
• Non-market Linked Returns– P2P lending is not affected by market fluctuations, thus allowing investors to protect their capital.

Risks And Considerations In Peer-to-Peer Lending

The RBI has strict rules to regulate the P2P lending industry to combat fraudulent activities. However, investors must understand the risks involved before investing in P2P platforms. Some considerations are:

• Default Risk– In unsecured loans, borrowers can default on loans, severely affecting investor returns. There is no compensation that P2P platforms can provide, but they will follow up with the borrowers to get the loan back.
• Less Liquidity– P2P investments have less liquidity as one cannot quickly repay the cash invested. Borrowers will repay the loan according to the EMI contract, and the money will be locked up until the loan tenure.
• Taxable Returns– With P2P lending investments, investors earn interest on the lending amount, which is taxable as per their tax bracket.

Alternative Investment Opportunities Comparable To P2P Lending

While P2P lending is emerging as a preferred online avenue for low-ticket size and unsecured loans providing innovative investment opportunities, its default risk is still a concern.

Consequently, products like LoanX are making alternative investments mainstream in a regulated manner. It provides a pool of loans to individuals, businesses, or other entities by an NBFC. As an investor, you get direct access to higher and more stable returns these loans generate.

LoanX is an investment-grade solution compared to P2P lending, offering a streamlined approach to gaining fixed income from short-term investments. It is a regulated and exchange-listed instrument and allows you to tap into unexplored investment opportunities.

Conclusion

Investing in Peer-to-Peer lending is an alternative investment option for investors who can invest their money without expecting liquidity for a short duration. One can choose borrowers with good credit ratings and low debt-to-income ratios to reduce risk exposure. Selecting the right P2P platform is also crucial, and it is best to decide to invest in multiple platforms for optimal diversification. 

However, there are better risk-reward alternatives available for savvy investors that are credit-rated, regulated, listed, and curated. Visit Grip Invest to learn more about new-age alternative investments and stay updated! 

References:

1. IndustryARC <https://tinyurl.com/2b45n4yw>
2. Business Today <https://tinyurl.com/3n6ywwfz>

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