What is peer to peer financing and how to become an a P2P investor?
Looking to make an investment as a lender in a P2P platform? Read this article to know the risks involved and the requirements you need to satisfy before you start signing up and putting your money in such platforms.
India is still battling with the credit crisis and that is holding the Indian economy to flourish. Getting a bank loan or loan from other NBFC's is not easy, especially for the salaried individuals. As per the study published by ASSOCHAM and EY, India's 19% of the population is still not covered under the umbrella of financial inclusiveness. Several million MSME, corporates and other individuals don't have a financial record and thus they are not eligible for the credit from the financial institution. The current un-banked population needs are yet to be addressed. Hence, an innovative concept has been launched peer to peer financing. Let's have a look.
What is P2P lending?
P2P lenders offer loans to the corporates, individuals and MSME and other borrowers to mitigate the risk of potential loss. Here is some reason why this kind of lending has become a staple among the borrowers.
Easy to process loans
In order to process a loan, the borrower needs to file an online application and the loan would be approved within a matter of minutes. You can apply from anywhere and wait for the approval.
Another benefit of P2P lending is the lenders ask for the competitive interest rates with different payback deadlines say one, three or five years. The interest rate is flexible depending upon the term selected.
Speed of approval
Third, the benefit is the speed of funding. Typically it takes around one or three weeks depending upon the kind of loan to get processed. The small loans can be funded easily within a matter of days.
Higher amount of loans are available
Whether you are planning to expand the business or want to achieve new heights, peer to peer financing method can prove to be of a substantial benefit. Now, the borrowers need not hesitate about how much loan approval will be made. They can quote the amount fearlessly.
Supported by the financial institutions
There are many countries like the UK where the banks support such kind of financing methods and believe that it is the backbone of social and economic eco-system.
Even the government of UK is pushing the borrowers to invest in P2P loans by making the interest earned tax- free.
Benefits to the lenders
P2P financing is a double-edged sword. It offers benefits to both the lenders and borrowers. Here's how the lenders can get benefited.
The lenders do not have to invest a huge amount to get the high returns. Even a paltry amount can do the job.
Unlike traditional bank account and risky stock market that requires a suitable knowledge, this kind of investment offer high returns and the investors easily get attracted towards it.
Lenders can choose the borrowers
Another benefit of P2P financing is the lenders can select the borrowers from their network and ensure that all the details are equipped with including the identity verifications. Borrowers are offered interest depending upon the amount quoted, risk, credit score and other related factors that may affect the lending algorithm. Lenders can invest in the loans which are profitable.
Risks associated with it
There are several risks associated with such of lending system. The major among them are:
Though the P2P platforms have made a safety cushion to protect the lenders against the losses, there exists a fundamental risk of default of the loans.
There may be times when the investor cash would lie idle in their locker waiting to match the requirements of the borrowers.
Our economy is highly volatile in nature due to poor political coordination, stress from the dollar and geopolitical uncertainty, which in turn result in the higher credit risk for the borrowers.
Insolvency of P2P platform
There are chances that P2P platform can become insolvent and hence the contract between lender and borrower would dissolve. The government should make a black and white written policy on how to dictate the payments, independent of the platform. This could calm down the turbulence in the life of investors and borrowers.
The speed at which we are expanding poses the digital risks. Even a potential collapse of one or two platforms can hamper the growth of the sector.
Cyber security threats
Cyber security is the major risk that this platform has to deal with. The hackers may steal the data, amount and thus leaving the lenders at the mercy of P2P platform.
P2P Financing in India
P2P Financing in India is still at a nascent stage and as the MSME in India is suffering from a huge credit gap, there is strong evidence that the government may support P2P financing or lending as it provides the loan at a high speed without any long-drawn process. Like the UK, India should also make provisions for tax-break to the lenders and it will encourage more lenders to help the borrowers to access the cheap credit.
P2P lending has a potential to rule the financial world. With favourable and innovative rules and tax policies the government can give impetus to both the borrowers and lenders, and this, in turn, will benefit the economy as a whole.
P2P platforms in India
Faircent.com is the first peer to peer platform that has received NBFC-P2P certification from the apex bank authority-RBI. This platform currently has more than 40,000 registered lenders and 3.5 lakhs borrowers and has offered 6,000 loans till date. And with this certification, the company would now be able to enter into the mainstream financial market with the confidence. BigWin Infotech is another firm that has been granted approval by RBI to start the business
Apart from that, there are other P2P companies that are operating in India like Monexo, i2ifunding.com, LenDen Club, etc. Even some of the companies have created an app to strengthen the confidence of the buyers and the lenders. With this app, both the buyers and lenders can get an instant cash loan by entering their Aadhar card number.
Returns that the investor will get
While fixed deposits may earn a return of 6% to 8% respectively, mutual funds may offer returns f 9% to 13%, with some funds yielding maximum of 15%, P2P loans can help the consumer to generate returns of 18% to 22%.
Lock In Period
Every investment comes backed with lock-in period, for example, the mutual funds have a lock-in period of 3 years, NPS for 10-15 years, but in case of peer to peer lending there is no lock-in period. With the monthly returns, the lenders can re-invest the money once again and earn more.
Different platform offer different returns depending upon minimum investment like for I2I the minimum investment is Rs 5000 and it will offer you returns in between 13%-25% with additional feature of principal protection, for Faircent the minimum investment is Rs 800, the returns expected 18%-36%, Lenden Club, the minimum investment is Rs 2000, the returns expected is 17%-36%, with no principal protection feature.
The minimum age criteria also depend upon the platform to platform, for i2i lending, the minimum age is 21 years, for Faircent it is 18 years.
Peer to Peer financing poses several challenges, but with a strong policy framework, the credit can be hassle-free. This facility is targeted to the millennial generation who lives in the smaller cities and has a difficult access to traditional sources of credit.