5 Things you should know about P2P Lending Platforms

Peer-to-peer (P2P) lending has become a prominent feature in the financial world, particularly as an alternative asset class that is changing the way individuals and businesses access capital. By facilitating direct connections between lenders and borrowers, peer-to-peer lending platforms bypass traditional banking systems, offering a more streamlined and often more efficient way of conducting financial transactions.

Understanding P2P Lending

So, what is P2P lending? P2P lending, or peer-to-peer lending, stands as a form of debt financing that allows individuals to lend and borrow money directly from one another, circumventing the need for traditional financial institutions to serve as intermediaries. 

This is made possible through P2P lending platforms, where borrowers can showcase their loan requirements—including the loan amount and its purpose—allowing lenders to review these requests and decide to lend money directly, covering the requested amounts either in full or in part. 

This method of direct lending and borrowing, facilitated by P2P platforms, often leads to more favorable interest rates for borrowers by eliminating middlemen and reducing the overhead costs typically found in conventional banking systems. For lenders, P2P lending offers a chance to secure potentially higher returns on their investments by directly funding consumer and business loans, in contrast to the returns seen from traditional savings and investment options.

Understanding “what is a P2P lending platform in India” involves recognizing this model as an innovative alternative to the conventional modes of lending and borrowing. It offers participants in the Indian financial market a new way to engage with debt financing, providing benefits for both borrowers seeking competitive loan terms and investors looking for higher returns. As you delve into the world of peer-to-peer lending in India, whether as a lender or a borrower, remembering five key points can help you navigate this space effectively, making the most of the opportunities it presents while carefully managing the risks involved.

1. Platform reputation and credibility

The success of P2P lending platforms is largely influenced by their reputation. The Indian market, with its diverse socio-economic strata, places great importance on word-of-mouth recommendations and testimonials. It’s imperative to select platforms that have been lauded for their transparency, integrity, and consistent performance. Reviews, ratings, and customer testimonials on trusted third-party websites or financial forums indicate a platform’s standing in the Indian P2P ecosystem.

Look for platforms that have a history of transparency, reliable customer reviews, and a track record of successfully connecting lenders with creditworthy borrowers. A good reputation is often built on past performance, customer service quality, and the ability to handle disputes or defaults.

2. Platform regulation and compliance

Given the surge in the popularity of P2P lending in India, the Reserve Bank of India (RBI) has set clear guidelines to regulate these platforms. Since 2017, the RBI has mandated P2P platforms to register as Non-Banking Financial Companies (NBFC-P2Ps). This means they are subject to strict operational and financial compliances. Before associating with a platform, Indian lenders and borrowers should ensure that it is registered with the RBI and adheres to all NBFC-P2P guidelines.

Adherence to regulatory guidelines not only ensures the platform’s legitimacy but also adds a layer of security for both lenders and borrowers.

3. Borrower screening and credit risk assessment

One of the critical determinants of the success of P2P lending platforms is their ability to assess the creditworthiness of borrowers accurately. An effective platform will have robust screening procedures, including credit checks and income verification. 

One crucial metric that potential lenders should consider while evaluating P2P lending platforms in India is the platform’s NPA (Non-Performing Assets) score. An NPA is essentially a loan on which the borrower has not made any scheduled payments for a specified period. A high NPA score indicates a large number of defaulters on the platform, which, in turn, can be a red flag concerning the platform’s borrower screening efficacy.

For investors and lenders, the NPA score provides a tangible insight into the platform’s credit risk. A low NPA score typically suggests that the platform has an effective screening process, stringent credit risk assessment, and a proactive approach to loan recoveries. On the other hand, a high NPA could signal lax screening standards or ineffective recovery mechanisms.

4. Returns and Fees

When investing in the different assets mentioned above, this can have a direct correlation with the rate of interest you can expect to receive back on your funds. Ranging anywhere from 8% to 13% expected return, this varies significantly between P2P lending platforms and can also be determined by the duration you want to invest for.

5. Secondary market and liquidity

For any investments, liquidity remains a primary concern for investors. The introduction of secondary markets and the availability of various investment plans have significantly addressed these concerns, making the P2P platform even more attractive. Let’s delve deeper into the liquidity aspect and understand the different plans available to investors.

Liquidity through various investment plans:

Fixed-term plans:

Overview: As the name suggests, these plans have a predetermined term. Investors lock in their funds for a pre-set period and cannot usually access the principal until the term ends.

Returns: Both the interest and the principal amount are paid out at the end of the term. It’s akin to a cumulative fixed deposit where the interest is compounded and given at maturity.

Ideal For: Investors who don’t require regular income from their P2P investments and are looking for potentially higher returns over a fixed period.

Monthly income plans:

Overview: These are structured to provide regular monthly returns to the investor, making them similar to receiving monthly interest from a traditional savings account or fixed deposit.

Returns: Interest is paid out monthly, ensuring a steady income stream, while the principal is returned at the end of the investment period.

Ideal For: Investors seeking a consistent monthly income, perhaps retirees or those wanting to supplement their existing income.

Liquid plans:

Overview: Tailored for those who prioritize liquidity, these plans offer the flexibility to release funds on demand. Investors can usually access their funds quickly, sometimes within days, making it comparable to the withdrawal ease of a liquid mutual fund.

Returns: While offering high liquidity, the returns on these plans might be slightly lower compared to fixed-term or monthly income plans due to their flexible nature.

Ideal For: Investors who might need to access their funds on short notice but still want to earn a return in the meantime.

Conclusion

In the evolving landscape of finance, P2P lending in India stands out as a promising avenue for both lenders and borrowers. With its unique blend of potentially high returns and transparent processes, it offers a fresh approach to investing. 

For those eyeing diversification into fixed-income assets, investing in P2P lending emerges as a robust option. And, as is the case with all investments, knowledge is power.

Happy investing!