Greater success of any invention lies in an idea which had paved the way for such invention. We have been always appreciating and enjoying, whenever there comes an idea out of nowhere and takes the world by storm and creates a huge business opportunity for the world, let it be an idea of introducing an online market to the 1.2 billion population or thinking of the concept of Peer to Peer(P2P) lending.
P2P lending is a mechanism for debt-financing where the small individual or business borrowers meet the actual lenders via a platform and source their monetary needs for their business or otherwise. If managed and supervised properly, it has the strength to gain a huge market in India and be a tough competitor for the regular bank-lending (small and medium). So far, loans from nationalized banks have been a tough row to hoe. But this P2P lending is believed to move the mountains and ease the business operations or provide easy loans to the individuals for a flexible tenure.
Though P2P lending got its momentum in the year 2010 globally, India took time to absorb the idea and venture into it as a new business opportunity. As of now, there are 8 registered NBFC-P2P companies in the business in India and in aggregate have approximately Rs.200 Cr market size which might reach to 11 digits in no time. Who thought of 20-30% returns on any of their investments before this? This P2P lending has come to blaze a trial, breaking the new ground for further opportunities. Though the numbers seems to be lucrative, serious attention on the individual portfolios and market trends is of at most importance.
Old school Investment modules Vs P2P lending
There are many modes of investment in India, the favorites being PPF, Fixed Deposits, RBI Bonds, Gold (ETFs) etc., As compared to the other Investment opportunities, the above mentioned are less riskier in terms of returns and are considered as safe spots for investments.
Investment is a subjective process. One mantra cannot hold good for everyone. The successful investor mixes both aggression and patience to a fine blend and prepares a fine recipe of return. The risk-return ratio plays a vital role in case of any investment. Higher the risk, higher the return and vice versa. Investors with the capacity to absorb the higher rate of risks prefer direct equity, IPO or small/mid sized equity funds etc., while who expect stable and safe returns go for PPFs, Bank deposits, RBI Bonds. Investors with equal risk-return ratio might prefer equity funds, debt funds, ELSS, Gold, Gold- ETFs and real estate.
Sensex had reported a gain of 11.30% in fiscal 2017-18 and Nifty 10.25% in the same year, the equity being highly and inherently volatile in terms of returns, the investor cannot rely on these figures blindly. One has to study the market thoroughly and opt a diversified portfolio to stay in the game. On the other hand, mutual funds have given a fair return percentage ranging from 10-12% but still, one can expect a better return than the above cited figure. PPFs and Fixed deposits with the Banks have been giving 7.6% and approximately 6.5% to 7% of returns respectively. Gold ETFs have also not crossed the comfort zone and have yielded not more than the above rates in the long-run. Having all these data, isn’t it lucrative if any investment, other than the above, makes you think of a possible return of 20-30% at a relatively lower risk? If this jaw-dropping number makes you nod your head in affirmation, P2P investment is definitely worth a try. Even though, this new lending/investment mode cannot be compared with the old school investment modules at this initial stage, the reasons being, the market size of this is relatively small compared to the former and for there being monetary limits set by the RBI on total investment size, one can think of investing the surplus money to earn good returns at a shorter span.
With all this information, if you have made up your mind to invest in P2P, the below information, in Q/A form, might help you on how to invest/lend in P2P mode:
A: One has to register with the NBFC-P2P as a lender to start investing/lending. After going through the borrower’s profile, the lender can invest money on selected borrower at desired interest rates. The lender should also check whether the entity, through which the investment is being made, has obtained the COR(Certificate Of Registration) from the Central Bank.
A: Person who intends to borrow money from the P2P platform should also register with registered NBFC-P2P as a borrower. The borrower will undergo a KYC process and every NBFC-P2P undertakes a due diligence on all its participants before he could borrow via the P2P platform. Better the profile, greater the chances of getting loans.
A: One can start lending at as low as Rs.500-750 and the RBI has capped the aggregate max, across all P2Ps, at Rs.10,00,000/- But the exposure of a lender to a specific borrower, at any point of time, is limited to Rs.50,000/- Hence, the borrower cannot source more than Rs.10,00,000/- across all the P2P platforms and also cannot borrow more than Rs.50,000/- from a specific person at any point of time.
A: The max tenure will be 36 months as set by Central Bank. The minimum being the requirement of the borrower.
A: The P2P platform should run a due diligence on all its participants along with KYC. The NBFC-P2P is required to be the member of all the CICs (Credit Information Companies), keep the credit information of the borrowers and update the CICs with the same at regular intervals. One who defaults in any P2P platforms will get under the scanner, making difficult for himself to avail loans from any other authorized sources. Further, the RBI has made NBFC-P2P responsible for the recovery of loans originated from their platforms and every NBFC-P2P shall equip itself with multi-level evaluation process which will keep the default rate in check.
A: No. International flow of funds has been prohibited by the Central Bank.
A: No. The NBFC-P2P is required to work with ESCROW accounts. Cash transactions are strictly prohibited.
A: Loans from P2P lending are 100% unsecured.
A: An overdue of principal and/or interest for 90 days or more is considered as an NPA.
Q: Can I prepay/part pay the EMIs?
A: Many of the online P2P platforms allow the prepayment/ Part payment of loans.
A: Yes, as per the RBI guidelines, no NBFC-P2P is not allowed to disclose the details of the participants to any third party with prior consent of the participants.
A: Yes, the company has to approve a policy for grievance redressal to address the complaints of the participants. Further, all the complaints should be handled/disposed off within one month from the date of receipt of complaint.
I guess, with all the question and answers, you might have quenched all your basic doubts on this new method of investment. I conclude this article with my suggestions, enlisted below, which might help you, before investing in the P2P lending.
> To start smart and stay low. Don’t dive into the pool without knowing the depth. Start your lending with min amount you can invest. Once, you think you have understood the market; you can invest good amounts with confidence.
> To check the default rate with the NBFC-P2P platform. Higher the rate, higher the risk on returns. Choose a company with minimal/nil default rate.
> To categorize your total investments based on the risk and returns. Usually, the chances of default on loans will be with higher interest rates. A ratio of 2:1 might hold good.
> To check the borrowers’ profile thoroughly before you enter an agreement with him/her. Unlike securities, there is no free entry and exit. Once lent, have to adhere to the terms and conditions of the agreement.