Can Peer-to-Peer Lending Work for You?

p2pPeer, or peer-to-peer, lending involves a digital platform that aggregates borrowers and lenders, essentially performing the role of a bank. Since there is no middleman in the process, P2P allows lenders to earn slightly higher returns than bank FDs. Interestingly, a message on BharatPe’s 12% Club app said that it will ‘reopen soon’ for fresh investments while existing investors will continue to get repayment. Generally, FinTech allows investors to access their money within a few hours or within 1-2 working days. This is made possible by keeping a fixed amount as a buffer and betting on the fact that not all investors will redeem their money at once.

A spokesperson for CRED said, “CRED Mint does not have a fixed lock-in period, which allows members to request immediate withdrawals after 7 days and earn interest for the period saved, allowing liquidity through our marketplace. provides.”

P2P lending is regulated by the Reserve Bank of India. Only Non-Banking Financial Companies (NBFCs) having P2P license can give such loans. Fintechs usually tie up with NBFCs such as LendenClub or Liquidones. The maximum tenure of this type of loan is 36 months. Maximum one can lend 50 lakh on all P2P platforms. over-lender Must produce a net worth certificate of more than 10 lakhs in P2P 50 lakhs from Chartered Accountant. An investor’s exposure to a single borrower, however, cannot exceed 50,000

how it works

P2P loans are personal loans and they generally fetch an interest rate of 20-24%. These types of loans are taken by individuals for purposes such as investing in their businesses, renovating their homes, or for family expenses such as marriages. The borrowers are usually self-employed or salaried individuals in the unorganized sector as the salaried employees of large companies are usually able to get personal loans from banks at lower rates. Out of the interest earned on the loan, a certain percentage is retained by P2P platforms (NBFCs) and fintech platforms, leaving the balance with the investor. In the case of Bharatpe, this amount is stated to be 12%, while in the case of Cred and Fi it is 9%. Platforms like Fi and CRED say they filter out low-quality borrowers from the P2P platform’s borrower base. Hence the return of the investor is also low. “Money invested in Cred Mint is loaned to the highly-trusted CRED member community through a credit loan product, Cred Cash. All members of CRED have a credit score greater than 750. Members may incur commissions, inefficiencies and other overheads There are benefits from the elimination of equities that eat into normal returns and hence earn higher returns in the process,” said a CRED spokesperson.

As a P2P investor, your returns depend on this simple math which is not going down due to rising defaults. P2P loan portfolios have rates of NPAs, or non-performing assets. As long as the NPAs can be absorbed by NBFCs or fintechs within the spread (the difference between the lending rate and the lending rate), investor returns are not affected. According to the Liquidones website, the gross non-performing assets accounted for 0.4% of the portfolio as on March 31, 2021. It reached 0.6% in September 2020. For LendenClub, the website states a default rate of 3.48%. It reached 5.86% in the first quarter of FY21. The widely varying exposure to risk suggests a lack of a standard calculation method. The Liquidones website further suggests that the NPA rate should be read cumulatively over a lending cycle. For example, if the NPA rate is 5% for one quarter, and the loan cycle is of 2 quarters, you should deduct 10% from your return. “The default rate for credit granted through CredCash has historically been less than 1%, the lowest among all existing credit providers. The money will diversify and reduce risk to more than 200 borrowers,” a CRED spokesperson said. Spread to reduce.

The P2P platform says that the risk level is manageable despite the high interest rate. According to Bhavin Patel, CEO of LendenClub, P2P platforms source borrowers from multiple places, including their websites and apps, as well as other digital apps. He said the interest rate of 20-24% is only slightly higher than what NBFCs charge. “It does not follow that such borrowers are prone to default. P2P borrowers are generally small borrowers. Our average ticket size is approx 20,000 Such borrowers are not sensitive to interest rates. Rather they focus on the full amount that they have to repay. For example, 24% on a loan of 20,000 is 400, an amount that borrowers don’t consider hard,” he said. However, as an investor, it is a high-risk product. If you are still interested in dipping your toes in it, then take it on your own. Limit yourself to a small portion of the portfolio.