P2P lending is for risk-takers, market poised to grow at 19% annually

It is a good opportunity for HNIs as returns can be extremely attractive

In the past few years, many high net worth individuals (HNIs) have begun to dabble with peer-to-peer or P2P lending. And reports suggest that the attractive returns, of as much as 10 per cent or more a year, are drawing HNIs towards this route. According to ResearchAndMarkets.com, the global P2P lending market is poised to grow at a compound annual growth rate (CAGR) of over 19 per cent and will surpass $44 billion by 2024. Newbies need to know a few things before taking the plunge.

Lender-borrower connect: P2P lending platforms connect borrowers with individual lenders, who come together to meet the former’s loan requirements. Says Rajiv Ranjan, founder and CMD of PaisaDukan.com: “P2P platforms use different models. Some have salaried individuals as borrowers, some have MSMEs, and so on.” Emergencies such as medical, rent, advance salary are leading reasons for borrowing on P2P platforms, says a LenDenClub study. 

P2P platforms remove financial institutions as direct intermediaries. Says Ranjan: “Unlike in traditional retail banking, P2P platforms are not lenders themselves. They provide a loan matching service by connecting prospective borrowers with lenders who provide the cash.” 
 

Many are increasingly finding it more comfortable to borrow from P2P lending platforms compared to traditional personal loans from banks or NBFCs as the process and the disbursement of loan is quicker. Says Manu Sehgal, business development leader, emerging markets, Equifax: “P2P lenders are now categorised and registered with the Reserve Bank of India (RBI). They submit loan performance data to credit bureaus. So, P2P loans will reflect on the credit report and will impact the credit score, just like any other loan.”  

A regulated space: A typical P2P borrower is one who may not be able to get bank funding. Either he is a sub-prime borrower with lower than optimal credit score, or he doesn’t have easy access to credit, like a small business, mom and pop store, etc. Says Rajat Gandhi, founder and CEO, Faircent.com: “The RBI regulates P2P lending platforms to protect the interests of lenders and borrowers.” According to RBI, the maximum a borrower can take at any point of time, across all P2Ps, is Rs 10 lakh. The exposure of a single lender to the same borrower, across all P2Ps, can not exceed Rs 50,000. The aggregate exposure of a lender to all borrowers, across platforms, is capped at Rs 50 lakh.  Says Ranjan: “All such interest income is taxable under ‘other sources’. Also, there’s no tax deduction at source.” 

Choosing borrowers: To register, go to the platform, fill the online form, and submit your KYC details. Some platforms charge an on-boarding fee, others change a fee later on. Once you have opened your account, you can see the profiles of borrowers. Some platforms allow you to choose the borrower and negotiate the interest rate. Others don’t permit you to decide the rate but allow you to choose the borrower. Says Bhavin Patel, CEO and co-founder of LenDen Club: “Choose a platform that allows you to diversify by lending to several borrowers at a time. If you have Rs 50,000, instead of lending to one borrower, lend Rs 500 to 100.” Once you firm up the terms like interest rate, tenure, amount and the like, you start to get your money back in the form of EMIs. Some platforms  charge a one-time fee at this stage. Interest rates range from 11-36 per cent. The processing fee usually varies from 3-5 per cent for borrowers and 1 per cent for lenders.

Understand the risks:  According to an RBI notification, P2P platforms need to get an explicit declaration from the lender stating that he has understood all the risks associated with the lending transactions and that the platform does not assure a return of principal or payment of interest. The declaration also states that there exists a likelihood of loss of entire principal in case of default by a borrower. The platform does not provide any assurance regarding recovery of loans. Says Patel: “Diversification of investment is the key. Spread your money across several borrowers.” Adds Gandhi: “Lend across risk profiles and geographies.” 

A high-risk debt opportunity: P2P investing can offer mouth-watering returns, but do not go overboard while investing in them. Says Bengaluru-based certified financial planner Lovaii Navlakhi: “We have not recommended P2P investing yet. But in future if we do, we won’t allow investors to put more than 1-2 per cent of their portfolio there.” The average industry default rate is 7-8 per cent.  
 

Some advisors recommend P2P to their investors, but with caveats. Says Sousthav Chakrabarty, co-founder and CEO, Capital Quotient: “Anyone who understands the risks can invest. As in equities, the  returns come over time. Diversify your investment across borrowers. On one exposure, you may make 23-24 per cent, and on another it could be zero. An average return of 11-13 per cent is achievable.” Those with low risk appetite should avoid it as it is essentially a high-risk opportunity in the debt  portfolio.