Peer to Peer (P2P) Lending for Retail/Individual Investors

Peer to Peer Lending or P2P Lending is a disruptive technology led innovation which is expected to add new dimension to the world of financing. It helps individuals like us to lend to real people to meet their real requirements and earn interest rates in 12% – 25% range. While it is still at a nascent stage in India, it is one of the leading means of financing in countries such as the US, the UK, Germany, China etc. It has been growing in leaps and bounds around the world thanks to an increase in the internet penetration and tremendous acceptability of e-payments. Even in India, with strong efforts from serious players such as Milaap, Rang De, i2iFunding etc., there has been increasing awareness towards P2P lending.

However, since most of the P2P platforms list unsecured personal loans, these at times tend to discomfort some of investors. However, a key point to note is that P2P loans are debt products backed by legally enforceable loan agreements and postdated cheques from borrowers. A defaulting borrower can easily be taken to court for recovery of dues. On the other hand, there are no similar provisions in case of loss suffered in mutual funds, stock market or any other market linked products which are perceived to be safe!

As with any investment, there are some risks in P2P lending and this is where a credible P2P platform has a very important role to play as an intermediary. It has to keep in mind the safety of lenders. The most important job of a P2P platform is to access the risk of each borrower on multiple parameters which include, credit history, debt burden, employment, education etc. It should have strong risk management framework to meticulously select credit worthy borrowers. Strict verification process should be diligently followed and should include corroborating the documents submitted by the borrowers against originals, visiting the borrowers’ premises, verifying the credentials of a borrower etc. Only those loans fulfilling the key requirements should be funded so that lenders are safe.

A P2P platform should also be able to provide guidance to the lenders on the interest rates they should receive on each of the loans. The idea is to appreciate the fact that retail lenders are pressed for time and they do not have tools to assess the risks of loans on the platform. The lenders will be overwhelmed with the number of loans on platform and will either end up frustrated or make wrong investment decisions. In addition, a P2P platform should handle all legalities including agreements etc. which should be enforceable in the court of law. They should also take other risk mitigating measures such as collecting postdated cheques etc. The key is to provide maximum safety to investments within the legal framework.

The lenders should also do their own ground work before making any investment decision. They should select a P2P platform carefully. Before investing through any P2P platform, they should carefully go through the details of services provided, check the level of defaults and get all their doubts sorted. They should always invest through a platform that is credible and does proper background checks and lists high quality loans.

The lenders should also invest in multiple loans to avoid putting all eggs in one basket. Moreover, they should look for platforms which provide additional features of capital protection to further safeguard their investments.

P2P platforms offer an opportunity to earn an interest rate up to 12-30% .

Investing on a credible P2P platform should be simple and yield attractive returns.

• Investor can enjoy attractive returns of 12% – 30% earlier available to banks and NBFCs only
• Investment is in a debt product which does not have equity like risks
• Loans are backed by legal agreements, post dated cheques etc.
• Serious P2P platforms also provide further protection against defaults
• Ease of transaction where one can track the investments and generate account statements

In addition, this also gives immense satisfaction to a lender that he can directly bring difference in his fellow countrymen’s life.
Dealing with an online P2P platform may sound contemporary; however, it’s the same traditional lending which has gone online with an added advantage of technology that empowers the lenders to unprecedented levels. The investors can review and evaluate all loans online, choose the loans and then invest in loans as per their risk appetite. They have an opportunity to invest in real borrowers all over India and that too at a click of a mouse.