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5 Things To Consider Before Lending On P2P Platforms For High Returns

Olga Robert

Peer-to-peer (P2P) lending has been catching up in India. P2P matches lenders and borrows online, making it profitable for lending companies as they save up on overhead expenses and allows them to earn a higher profit margin when compared to traditional financial institutions. At the same time, borrowers can obtain loans are cheaper rates.

Though the P2P lending companies charge a fee for the matchmaking and performing credit checks on the borrower, there is a risk that the borrower will default on the loan. Additionally, most of these loans are unsecured by collateral.

Popular among businesses, these helped companies and individuals source their smaller needs like higher education, real estate, and commercial needs. Some of these are secured by luxury products like cars, fine art and aircraft.

If you are planning on lending on a P2P platform to earn a higher return, make sure to consider the following aspects.

Registration

P2P lending in India is still unregulated and the RBI is working on its guidelines. However, there are NBFC (non-banking financial companies) that have registered their P2P lending businesses with the regulator.

These are required to have a net-owned fund of at least Rs 2 crore and the management and directors are required to fulfill the criteria laid out by the RBI. They are also required to disclose and report information like that of borrower's credit and have other compliance requirements.

An NBFC's registration with the RBI is one of the ways to judge the platform's legitimacy before you lend money on it.

Note that most platforms are not registered. You can find the information on RBI's website.

2. Target borrowers

Since P2P lending is largely unregulated, many Indians are not even aware of such a debt financing service. At present, it has been mainly helping individuals and small businesses that have had their loan applications been rejected by banks in the past or do not qualify for a bank loan. It has also helped those with poor or no credit scores to seek loans in India.

3. Loan volume

You need to check the number of loans already disbursed by the platform and its listed customer base. If it is small, you may not get a borrower for a long time.

4. Default rates

These registered NBFC-P2P platforms are required to disclose the performance of their portfolio to maintain transperancy. There could be chances that the data is not complete. You need to perform your due diligence on how the platform deals with its defaulters to recover the asset, check its borrower rejection rate and what procedure it follows to regularize any outstanding payments. Also, how effective is their current recovery procedure.

You could ask for the last 12 months data to get a clear picture.

5. Returns

Investors are attracted to NBFCs for their high-interest rates or rather, higher returns on investment (ROI). It is important to understand that a higher ROI means higher risk.

Scroll through the categories of borrowers on the platform to get an idea of the default rate and ROI. You can decide to diversify your money in different categories to distribute the risk.

Additionally, note that an investor has the right to know the borrower's name, credit background, occupation, etc. You can ask the company if the data is unavailable.

You can also judge for yourself based on the borrowers' on-boarding criteria, underwriting standards and the rejection rates.

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