Lending on P2P platforms is risky

Possibility of 16-22% annual returns is attractive but analysts suggest caution till norms are put in place

Becoming a lender at a peer-to-peer (P2P) lending platform could appear attractive. You lend to an individual whose credit profile has been evaluated by the P2P platform and start earning equated monthly instalments the next month. The returns can be as good as 16-22 per cent returns a year, more than double most annual fixed deposit rates. But, this investment comes with much higher risk.

“They are meant for investors who understand  there is no guarantee that all loans will be repaid and can stomach losses if a borrower goes delinquent,” says Lovaii Navlakhi, founder and chief executive officer (CEO) of International Money Matters.

 

Some are also promoting lending at P2P platforms as an alternative to fixed income instruments such as fixed deposits (FDs) in the falling interest rate scenario. Money managers say it’s not the correct way to look at lending on such platforms. “FDs are far safer. In P2P lending, an individual should have credit evaluation skills and take a call on a borrower’s credit profile,” says Arnav Pandya, a certified financial planner.

Rajat Gandhi, founder and CEO of Faircent.com, says there are investors who have an investment portfolio upwards of Rs 60 lakh on the platform. Bhuvan Rustagi, co-founder and chief operating officer at Lendbox, says the company has investors that have a portfolio of above Rs 50 lakh. “Typically, investors start with Rs 15,000-20,000 and after some months increase the amount as they gain confidence,” says Shankar Vaddadi, founder of i-lend.

Many top P2P players realise the risks and put in measures to reduce it. Players such as Faircent, i-lend and Lendbox don’t allow an individual lender to fund a single loan. Faircent allows lenders to fund only 20 per cent of the total loan a borrower needs, i-lend lets a lender fund up to 35 per cent and Lendbox permits 25 per cent. This allows lenders to spread their risks across borrowers.

The platform also evaluates borrowers and assesses their credit profile using multiple parameters. They also ensure that there’s a legally binding loan agreement signed between lenders and borrowers and can be used to drag borrowers to court for breach of contract if they don’t repay. They also take post-dated cheques from borrowers, which can be used for legal proceedings in case of cheque bounce.

While these measures are in place, lenders can’t always implement them. “These are low-ticket loans. The time and effort that would go into recovering the money may not be commensurate with investments,” says Brijesh Dalmia, a certified financial planner. If you have lent Rs 10,000-20,000, fighting a court case can be expensive.

P2P lending is not yet regulated. The Reserve Bank of India is finalising regulations. “Being unregulated, there’s scope of frauds from borrowers. If someone is planning to lend on P2P platforms, it’s better to wait until regulations are in place,” says Pandya.

Financial planners also suggest that individuals should use only a small part of their portfolio for P2P lending. “If you are confident about lending, use only a small portion of your portfolio to generate incremental returns that can help meet financial goals,” says Navlakhi.