Peer-to-Peer Lending: Advantages & Disadvantages

What Is Peer-To-Peer (P2P) Lending?

Peer-to-peer lending is borrowing directly from an individual. In this borrowing, banks and other financial institutions are not required.

How does P2P lending work when no banks and financial institutions are involved in lending and borrowing? 

There are P2P lending platforms on which borrowers can create profiles and update their financing needs. Lenders can assess the profiles of the borrowers and choose whether to lend or not. They can distribute their capital to multiple borrowers, minimising the default risk. 

Peer-to-peer loans increase capital access for borrowers and fixed-income opportunities for lenders. While interest rates may be higher than traditional financing, they offer an alternative for borrowers without collateral or a credit score. It provides financing to those excluded from bank loans, promoting financial inclusion. 

P2P Lending Marketplace

Due to ease of operation, P2P lending is gaining popularity among lenders and borrowers of unsecured loans. The Indian P2P lending market is forecasted to reach $10.5 billion by 2026, growing at a CAGR of 21.6% from 2021-2026. While the online platform facilitates connectivity, it is crucial to recognise the associated risks. 

This is the reason behind strict P2P regulations in India. According to the RBI, any entity aiming to operate as a P2P lending platform must meet the following requirements:

• Start-ups must register as NBFC-P2P under the Companies Act 2013 before launching operations, demonstrating proof of owned funds of at least INR 2 crores.
• Existing NBFCs (Non-Banking Financial Companies) must also obtain peer-to-peer lending registration to initiate P2P operations.
• NBFC-P2P should solely act as an intermediary between lenders and borrowers.
• Individual lenders can lend a maximum of INR 50 lakhs across all P2P platforms.
• Lenders investing over INR 10 lakhs should provide a minimum net worth certificate from a chartered accountant.
• Borrowers can borrow a maximum of INR 10 lakhs across all P2P platforms.
• A single lender can only lend a maximum of INR 50,000 on P2P platforms to a single borrower.

List of P2P Platforms In India

Some of the leading P2P lending platforms in India are provided below. These platforms are approved by the Reserve Bank of India (RBI):

• LenDenClub
• Liqui Loans
• India P2P
• Faircent
• Finzy
• i2iFunding
• 12% Club

Pros And Cons Of P2P Lending Platform

Advantages Of P2P Lending Platform

• P2P lending opens financing for those struggling with mainstream banks and NBFCs. Borrowers with limited credit history can easily access personal, business, and merchant cash advance loans.
• P2P loan interest rates are generally lower than those of credit cards or private lending. Quick fund access aids in seizing immediate opportunities for business and personal finance.
• On the lender side, P2P investment benefits include attractive 10-16% returns that outperform fixed deposit rates. Diversification across borrowers reduces risk, and steady repayments provide liquidity.
• P2P offers financial inclusion, benefiting SMEs, first-time borrowers, and rural areas. 

Disadvantages Of The P2P Lending Platform

• Like any loan, there is a chance that borrowers may default in P2P lending. The platforms minimise the risk of default through underwriting. However, lenders should anticipate a certain percentage of borrowers defaulting. 
• Withdrawals and exits pose challenges as most loans lock in capital for 1-3 years. The secondary market for P2P loan trading is limited in India. Despite RBI regulation, fraud risk, data protection, and platform shutdowns persist.
• While some P2P platforms offer liquidity/ exit to lenders at any time, RBI has recently stopped such an offering due to increased chances of default.
• For borrowers, existing relationships often favour banks, NBFCs, or informal channels. Maximum loan sizes on Indian P2P platforms are limited to  INR 10-50 lakh, lower than traditional institutions.
• RBI rules prohibiting extra charges on delayed payments make it challenging for platforms to penalise defaults, placing more risk on lenders.
• Trust in P2P platforms among borrowers and lenders is still developing, influenced by high defaults and fraud risk. P2P investments do not have a credit rating, so determining the degree of risk becomes more challenging.

Future of P2P Lending

The future of P2P lending in India looks promising, considering the forecasted market size of $10.5 billion by 2026. The industry is evolving with the integration of blockchain technology and artificial intelligence. Blockchain ensures transparency and security, while AI improves credit assessment accuracy and enhances the customer experience. However, with these advancements, the industry is also facing tight scrutiny by the Reserve Bank of India (RBI). 

Some platforms are reducing ties with significant consumer companies experiencing slower growth. The RBI has increased scrutiny due to concerns about platforms misrepresenting risks with promises of high returns. They are requesting data on finances, customer onboarding, and IT infrastructure. Considering these challenges, investors must look for an alternative to P2P lending. It will help them balance their portfolio and minimise risk.

Alternatives To P2P Lending

Peer-to-peer (P2P) lending is a new way for people to lend and borrow money directly from each other. But there are other options for investors, too. One of them is LoanX. It’s a safe and regulated investment option listed on the stock exchanges (NSE/BSE). When you invest in LoanX, you can expect around 12-14% returns. LoanX is a securitised debt instrument (SDI) structured in compliance with the SEBI and RBI guidelines. 

If you are interested in exploring the key features of LoanX compared to P2P lending, read our latest blog!

Conclusion

Peer-to-peer lending is proliferating in India. It is a way for people to borrow money quickly and for others to invest and earn higher returns. However, risks are involved, such as borrowers not paying back or fraud. To reduce these risks, it is essential to check out the borrower’s profile carefully, spread your investments across many loans, and use trustworthy platforms.

Alternatively, you can explore securitised debt instruments (SDIs) like LoanX. These opportunities offer better risk-adjusted returns and are regulated by SEBI and RBI. To learn more about these opportunities explore Grip Invest.

Frequently Asked Questions On Advantages And Disadvantages Of P2P Lending

1. Is P2P lending high risk?

Peer-to-peer lending offers potentially higher returns than traditional investments but comes with higher default risk. You loan money directly to individuals or businesses without the same security as a bank.

2. Are there secured alternatives available for P2P lending?

Yes! Instead of P2P lending, you can consider LoanX. It is a securitised debt instrument regulated by SEBI. When you invest in LoanX, you are putting your money into a pool of loans from a reliable financial institution. LoanX is also a rated product, meaning all the LoanX opportunities are rated by leading credit rating agencies such as CRISIL and ICRA. It is listed on the stock exchange and manageable in a demat account.

3. What are secured and unsecured loans?

Secured loans use assets like property or vehicles as collateral, granting lenders the right to seize them in case of borrower default. Unsecured loans, such as P2P loans, lack collateral, making them riskier for lenders.

4. What are the benefits of investing in secured loans?

Investing in secured loans offers several advantages:

• Lower risk: Collateral protects against borrower default, instilling higher investment confidence.
• Potentially higher returns: Secured loans offer competitive interest rates compared to some traditional investments like savings accounts and fixed deposits.
• Diversification: Adding secured loans to your portfolio diversifies holdings and potentially enhances the overall return on investment.

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