Home / Money / Personal Finance /  Can peer-to-peer lending work for you?

Earlier this month, Fi, a neobank announced that it would offer P2P lending to its customers with returns of up to 9%. Fi is only the latest fintech player to enter this space. In August-September 2021, two other firms—Bharatpe and Cred—made similar announcements about the launch of P2P lending.

P2P, or peer-to-peer, lending involves a digital platform aggregating borrowers and lenders, essentially performing the role of a bank. Since the process rules out the role a middleman, P2P allows lenders to earn a slightly higher return than that from bank FDs. Interestingly, a message on the 12% club app of Bharatpe says that it will ‘reopen soon’ for fresh investments while existing investors will continue to receive repayments. Generally, fintechs allow investors to access their money either within a few hours or in 1-2 working days. This is made possible by holding a certain amount as buffer and betting on the fact that all investors will not redeem their money at once.

“CRED Mint does not have fixed lock-in periods, providing members liquidity through our marketplace by allowing them to instantly request withdrawals after 7 days and earn interest for the duration saved," a spokesperson from CRED said.

P2P lending is regulated by the Reserve Bank of India. Only non-banking financial companies (NBFCs) which have a P2P license can give out such loans. Fintechs generally tie up with NBFCs such as LenDenClub or Liquiloans. The maximum tenure of this type of a loan is 36 months. One can lend a maximum of 50 lakh across all P2P platforms. Individuals who lend more than 10 lakh in P2P must produce a net worth certificate of more than 50 lakh from a chartered accountant. The exposure of an investor to a single borrower, however, cannot exceed 50,000.


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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 family expenses like marriages. Borrowers are generally self-employed or salaried individuals in the unorganized sector since salaried employees with large companies are usually able to get personal loans from banks at lower rates. From the interest earned on loans, a certain percentage is retained by the P2P platform (NBFC) and by the fintech platform, leaving the residual amount to the investor. In case of Bharatpe, this amount is stated to be 12%, while in case of Cred and Fi, it is 9%. Platforms like Fi and CRED say that they filter out lower quality borrowers from among the borrower base of the P2P platforms. Hence the investor return is also lower. “Money invested in CRED Mint is lent to the high-trust CRED member community through CRED Cash, a CRED lending product. All CRED members have a credit score over 750. Members benefit from the elimination of commissions, inefficiencies, and other overheads that eat into typical returns and so earn higher returns in the process," the CRED spokesperson said.

As a P2P investor, your returns depend on this simple math not going askew due to rising defaults. P2P loan portfolios do have rates of NPAs, or non performing assets. So long as the NPAs can be absorbed by the NBFC or fintech within the spread (the difference between the lending rate and borrowing rate), the investor return does not get affected. According to the Liquiloans website, Gross Non Performing Assets as of 31 March 2021 were 0.4% of the portfolio. This peaked out at 0.6% in September 2020. For Lendenclub, the website states a default rate of 3.48%. This peaked out at 5.86% in Q1 of FY 2021. The vastly differing displays of risk suggest a lack of a standard calculation methodology. The website of Liquiloans further goes on to suggest that the NPA rate must be read cumulatively—over a lending cycle. For example if the NPA rate is 5% for a quarter, and the loan cycle is 2 quarters, you should deduct 10% from your return. “The default rate for credit given through CRED Cash has historically been less than 1%, the lowest among all existing credit providers. The money is also spread across more than 200 borrowers to diversify and reduce risk," the CRED spokesperson added.

P2P platforms maintain that the risk levels are manageable despite the high interest rate. According to Bhavin Patel, CEO, LenDenClub, P2P platforms source borrowers from a variety of places including their own websites and apps as well as other digital apps. The interest rate of 20-24% is only slightly higher than what NBFCs charge, he added. “It does not follow that such borrowers are prone to default. P2P borrowers are generally low ticket size borrowers. Our average ticket size is around 20,000. Such borrowers are not sensitive to interest rates. Rather they focus on the absolute amount they have to repay. For example, 24% on a loan of 20,000 is 400, an amount that borrowers do not consider onerous," he said. As an investor however, it remains a high risk product. If you are interested in dipping your toes into it nonetheless, restrict it to a small part of your portfolio.

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