personal finance

Five things you should know before lending on P2P platform


‘Invest in peer to peer lending in India. Earn up to 35 per cent returns.’ You might have come across the claim at least once or twice during the last month. Did you wonder: Really, can one actually earn double-digit returns by lending money online?

Well, P2P loans is an innovative way to invest your surplus money and earn monthly cash flow. But the lending and borrowing eco system comes with the risk of default.

Here’s a list of five things you should know before planning to lend on P2P.

Start small

Don’t let greed cloud your judgment. If you are in a tearing hurry to pocket double-digit returns, you are likely to overlook many warnings signs. That is why it is always better to start with a small amount, learn the ropes, before going for the kill.

Different platforms have different ticket size for lending. With companies like Faircent offering as low as Rs 750 per loan. The ROI would vary as per the borrower profile and loan tenure. The total amount invested by a lender across all P2P-NBFCs is capped at Rs 10 lakh, as per the existing RBI norms.

“One should put part of his portfolio in P2P lending. I would recommend everyone to lend small (over a period of 3-6 months) and diversify among various borrowers,” says Rajat Gandhi, Founder & CEO, Faircent.

The RBI came out with regulations for P2P companies in October. There are around 30 online P2P companies in India, of which only eight have received a certificate of registration (CoR) from the RBI to carry out P2P lending activities.

Most of the P2P companies,
ET Online spoke to, believe that the lender should not be in a hurry to take the money out, but wait for a good three to six months for his money to deliver results.

Dhiren Makhija, Co-Founder, Cashkumar, says, “If one (lender) has a principal amount of Rs 1 lakh and is earning an interest of Rs 30,000 on it, I would advise him to put the principal back and rotate his funds (for better return.)”

Bengaluru-based Cashkumar, which was a loan aggregator before getting the P2P licence in July this year, has a repeat borrower base of 30-35 per cent. “P2P is something like investing in equities. As a lender, it’s important to diversify the money into different platforms,” adds Makhija.

A P2P loan approval may take up to five days with some P2P companies offering facilities like same-day loan approval. However, it’s advisable to understand the nitty-gritties before starting out big on the platform.

“Every financial instrument requires some understanding. Do your research before you get into it,” says Bhavin Patel, Founder and CEO, LenDenClub.

Raghavendra Pratap Singh, Co-founder, i2ifunding.com, seconds: “It’s better to compare the various platforms and learn about P2P lending before investing bigger amounts of money.”

The amount invested should be carefully divided among different platforms and spread thoughtfully among the borrowers.

Diversification is the key

You should try to spread out your money among multiple borrowers. “Diversification is the biggest remedy to mitigate risks while lending on P2P. If you can take some risk, Rs 25,000 to Rs 50,000 per month can be invested to get up to 35 per cent return annually,” says Patel of LenDenClub.

One needs to look at the average return offered by various platforms to diversify the portfolio well.

“One should have at least 100 borrowers in one portfolio. Also, invest the money every month instead of putting everything in lump sum. There could be good borrowers coming every month. Don’t get greedy just because you see a higher interest rate (30 percent returns) in a portfolio. It will have a higher risk,” says Gandhi of Faircent.

Always check the borrower profile

Most P2P companies divide the borrowers in categories like very low risk, low risk, moderate risk to high risk and very high risk profiles. The ROI on the investment would depend on the borrower profile, tenure and the amount of loan. Companies offer interest rates starting from 12.5 per cent to 35 per cent based on the the level of risk.

Surendra Kumar Jalan, Founder & CEO, OML P2P, says, “Evaluating the risk profiles of borrowers is important to diversify the portfolio. One can go for moderate to low risk profiles (for good return).”

Jalan has a 30:60:10 formula to create an ideal P2P portfolio. “If you have Rs 100, you should invest 25-30 per cent in low risk, 50-60 per cent in moderate risk and 10 per cent or less in high risk profiles.”

“P2P is an alternative asset class which has its own value and potential. One should invest according to his risk appetite,” adds Jalan.

Lending to unrated and high risk borrowers may not always give high returns, as the possibility of a default is higher in this segment.

“If one is chasing only higher returns, without checking the profile of the borrowers and the credentials of the platform, one might end up burning his fingers,” adds Singh of i2ifunding.

Some of the P2P platforms boast of stringent criteria for selecting the borrowers in order to control defaults. “Out of 40,000 applications received, hardly 1,500-2,000 people go live on the site post the verification,” adds Gandhi.

People with a low repaying capacity, past record of default reflected in their CIBIL data are more likely to get rejected on the platform. It’s also crucial to check the income to debt ratio while selecting the borrower.

Always check the defaulter rate

Defaulter rate reflects the ratio of defaulters on a given platform and is vital in choosing the company. The defaults could be due to intentional or capability issues of the borrower. It’s advisable to check if the company has displayed the defaulter rate explicitly on its website.

“One needs to check the default rate as well as the risk rating while choosing the borrower,” says Gandhi of Faircent.

People choose a platform based on the credentials of the company. “Reputational risk is much higher than anything else for P2P companies,” says Jalan of OML P2P. Remember, the ROI would depend on the profile of the borrower. And the quality of borrowers would define the default rate on a platform.

Keep older company

In a fast growing sector like P2P lending, companies with RBI licences may have an extra edge over the newer players.

“With the RBI regulation in place for P2P lending, the older players are better placed than the newer ones (which are yet to get the licence). However, there is no meaningful competition among the companies since we are still at an initial stage,” adds Jalan of OML P2P.

“One should look at the vintage of a company before choosing the platform,” feels Patel of LenDenClub.

“Of course, vintage is important for lenders. Companies (that started early) would be able to display more data and would have a better credit evaluation mechanism,” says Gandhi of Faircent.

i2ifunding, which is expecting the RBI licence this month, holds a different view. “P2P lending has not reached to a size where the winner takes it all. As soon as you get the licence, you are at par with the other players. Companies that have already applied for licences will get it in next two to three months. P2P players with good credit evaluation (of the borrower) and the lowest default rate will eventually succeed.”

“The quality of loan and the quality of the portfolio will decide the growth of the company. If the lenders make money, they will come back on the platform. If they don’t, they will not,” adds Singh.





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