Pros And Cons Of Peer-to-Peer Lending Platforms

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Grip Invest
Grip Invest
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Jan 23, 2024
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    What Is Peer-To-Peer (P2P) Lending?

    Peer-to-peer lending facilitates direct borrowing and lending between two individuals without involving banks and other financial institutions. P2P platforms connect borrowers directly with individual lenders, bypassing traditional intermediaries.

    Borrowers can create profiles on the P2P lending marketplace, putting their loan needs and helping lenders assess credit risk. Lenders can choose borrowers based on profiles, credit scores, and other factors. 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. 

    Currently, P2P lending in India is nascent and requires regulatory compliance. 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.

    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 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, outperforming 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 P2P Lending Platform

    • Like any loan, there is a chance that borrowers may default. Although platforms aim to minimise this risk through underwriting, lenders should anticipate some bad debt. P2P platforms have operated for only a few years and have a limited credit evaluation track record. 
    • 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 anytime liquidity/ exit to lenders, RBI has recently taken action to stop 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

    Alternatives To P2P Lending

    While P2P lending presents innovative opportunities, secured alternatives are available for investors. LoanX is an investment-grade and regulated investment instrument listed on NSE/BSE, offering 12-14% returns. It provides a simplified way to earn predictable fixed income from short-term investments, offering access to new and untapped opportunities while ensuring the safety of your investment. 

    P2P Lending Platform

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

    Conclusion

    Peer-to-peer lending rapidly evolves in India as an easily accessible credit channel for borrowers and a higher return investment for lenders. However, investors and borrowers should carefully assess inherent risks like defaults and fraud in this nascent industry. Exercising diligence in analysing borrower profiles, diversifying investments across many loans, and using reputable platforms can help optimise the risk-return profile.

    Alternatively, securitised debt instruments (SDIs) like LoanX offer better risk-adjusted returns on a diversified pool of loans. Explore Grip Invest and stay updated with regulated, rated, and exchange-listed investment instruments. 

    Frequently Asked Questions On P2P

    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?

    While P2P lending is innovative and convenient, it may pose higher default risks. However, several secured alternatives to unregulated P2P lending are available, for example, LoanX, a unique investment opportunity that lets investors invest in a diverse pool of loans originated by an investment-grade NBFC. It is a SEBI-regulated, credit-rated, and exchange-listed fixed-income investment option.

    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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    Disclaimer - Investments in debt securities are subject to risks. Read all the offer-related documents carefully. The investor is requested to take into consideration all the risk factors before the commencement of trading. This communication is prepared by Grip Broking Private Limited (bearing SEBI Registration No. INZ000312836 and NSE ID 90319) and/or its affiliate/ group company(ies) (together referred to as “Grip Invest”) and the contents of this disclaimer are applicable to this document and any and all written or oral communication(s) made by Grip Invest or its directors, employees, associates, representatives and agents. This communication does not constitute advice relating to investing or otherwise dealing in securities and is not an offer or solicitation for the purchase or sale of any securities. Grip Invest does not guarantee or assure any return on investments and accepts no liability for the consequences of any actions taken based on the information provided. For more details, please visit https://www.gripinvest.in/. 
    Registered Address - 106, II F, New Asiatic Building, H Block, Connaught Place, New Delhi 110001. 

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