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P2P Lending club is an alternative investment option for investors looking for better returns and borrowers looking for cheaper and quicker options.
Traditionally, people approached banks or financial institutions for deposits and loans. Over time, with the equity and mutual fund market picking up, people started investing in these options to earn inflation-beating returns. Borrowers had limited options. A personal loan or car loan or home loan needed them to approach a bank or limited financial institutions offering these loans. Repaying the loan along with interest and managing to keep themselves ahead of inflation eroding their incomes was an uphill task, to say the least.
These needs were identified by Peer to peer lending institutions and they came up with a platform where investors could earn up to 35% on their investment while borrowers could get loans at rates proportional to their credit profile.
To make this a viable model for both investors and borrowers, it was necessary to have certain requirements in place:
- Simple and easy to use platform
- Diligent assessment of the borrower’s credit profile to help borrowers get lower rates and investors get a fair idea of the risk class of the borrower
- Offer a qualitative and quantitative risk assessment of each borrower
- Assist investors to earn better returns by diversifying across borrowers and risk classes
- Availability of a communication and negotiation platform to aid the lending process
- Assistance in case of delays in repayment.
Most P2P lending platforms in India like i2ifunding, LenDenClub are offering these features.
Is it safe to invest money in P2P lending?
Investors are often worried about the safety of the capital invested in P2P lending club. However, it is pretty safe due to risk diversification, borrower profile verification, transparency and RBI regulations.
The peer to peer lending club in India is growing popular as an alternate credit investment. However, it is still in the infancy stage in comparison to that in China and the United States. Hence, the first-time P2P lending club investors often worry about the safety of their money while lending money online.
While no investment is 100% risk-free, P2P lending club is a safer option for the investors owing to the following factors:
Lower Investment
You can start investing in P2P lending club with an amount as low as Rs.5,000. So, you are not putting a higher amount of money at risk in one go. You can start slow and test the waters before investing more.
Risk Diversification
Let’s say, you want to invest 5 lakhs. Now, instead of lending money online to one single borrower, you can disburse the amount between at least 3-5 borrowers. This will diversify your risk in case one of the borrowers defaults.
Borrowers’ Profile Verification
The P2P lending club companies in India does an internal credit evaluation to verify their personal, professional and financial information, digitally as well as personally. They assess the creditworthiness of the borrowers and take care of the documentation. Hence, you are saved from the trouble of conducting due diligence on your own, which may not be possible due to lack of or limited resources.
Transparency in P2P lending club
All the communication between the borrowers and lenders happens online through the P2P lending club site. You can get continuous updates on how your money is being invested. Hence, there is complete transparency in the entire process.
RBI Regulation
RBI has already proposed peer to peer lending in India as Non-Banking Financial Institutions (NBFCs). It is in the process of regulating the sector to protect the interests of all stakeholders – lenders, borrowers, and P2P lending platforms. The P2P lending India companies would have to submit regular performance reports to RBI. Hence, the sector is expected to become more organized and transparent.
The ideal way to ensure the safety of lending money online is to first assess the P2P lending club platforms on the various parameters listed and invest only through a reputed and trustworthy platform.
What is the scope of P2P lending club in India?
Peer to peer lending club in India is witnessing impress growth owing to an increase in demand for online loans and alternate credit instruments. The RBI regulation and digitization are also boosting growth.
The peer to peer lending in India is expected to reach $50 million market size. The sector has witnessed impressive growth over the past two years. The outlook will only get better as RBI has taken it under its wing.
The demand for personal loans has gone up considerably. According to RBI, personal loans grew 19.4% in March 2016 as compared with 15% the year ago. However, there isn’t enough supply of loans to meet the demand. It is no hidden fact that borrowers have to go through a cumbersome and time-consuming loan application process to avail loans from banks and other financial institutions. Owing to the ease of borrowing from P2P lending companies, borrowers are now turning to online personal loan lenders.
As the number of borrowers increases, lenders can build a better portfolio and earn higher returns. Right now, lenders earn interest in the range of 12.5% to 35% on P2P lending platforms. This is higher than the traditional investment instruments.
RBI intervention is another factor that is fuelling the growth of peer to peer lending in India. RBI has proposed giving Non-Banking Financial Corporation (NBFC) to P2P lending companies in India. It has also announced various other guidelines to safeguard the interest of all stakeholders – lenders, borrowers, and P2P lending India platforms. Experts also predict that P2P lending portals will be able to access credit bureau data, which will result in lesser defaults on P2P lending investment.
The recent demonetization drive has reduced bank deposit interest rate further. Real estate market is dwindling and the stock market is always uncertain. So, investors are now keen on exploring P2P lending as an alternate credit instrument.
The emphasis of the ruling government on digitization has provided a further boost to the P2P lending market in India. An increasing number of lenders and borrowers, especially millennials, are moving towards cashless transactions. P2P lending sites are using technology to enable cashless loans and quick processing of loans. They are reducing communication barriers between lenders and borrowers.
All these indicate that P2P lending in India will become more organized and transparent in a few years time. It holds tremendous potential and will only strengthen its roots further in India.