Earn money by becoming a peer-to-peer lender

P2P lending service can be an alternative investment avenue if one can stomach the risks involved with it

Microsoft founder Bill Gates once famously said: “Banking is necessary, banks are not.”

These are interesting times, thanks to technology. For they allow people like you and me to become a ‘bank’ to many who need loans. Apparently, banks don’t like to sanction a personal loan if the borrower is below 25 or working at SME. If the borrower is aged above 30 and has not taken a loan before, his/her loan application has a high chance of getting rejected. There is huge number of people out there who need loans, but traditional lending systems are wary of lending to them. What if someone wanted to lend for a good cause and earn some interest on the way? That’s not a bad way to make a living. Till peer-to-peer (P2P) lending emerged in India, one had to either become a bank or a moneylender to do that. Becoming a P2P lender can now be an alternative investment avenue if one can stomach the risks that come along with it. Interested? Read on.

P2P lending: The world saw P2P lending emerge about 10 years back. A company called Zopa is credited with being the oldest peer-to-peer lending platform, having launched in March 2005. Then the trend came to India. We have had informal systems of moneylending for centuries in India. So what makes P2P lending different? Explains VVSSB Shankar, founder of i-lend, “Money lending requires a large corpus to get steady returns. Also, an individual has to build the entire necessary infrastructure himself/herself, which is not possible for everyone.”

Moreover, verifying people’s credentials, collection mechanism etc need to be established. P2P platforms ensure that these facilities are built by them and give individuals an opportunity to lend small amounts and get a steady return. Today, there are about 36 P2P lending platforms in the country, including Faircent, i-lend, Lendbox, LoanMeet and i2ifunding, among others.

The opportunity: The moneymaking opportunity in P2P lending service is pretty big. Foundation Capital estimates that marketplace lending will see $1 trillion in loans being originated globally by 2025. In the simplest terms, banks match savers with borrowers. They pay interest for deposits and grant loans to businesses and consumers. Depositors see their savings grow while borrowers use the capital. Banks profit handsomely on the spread. The advent of technology has meant that P2P lending platforms can, at least claim to, do the same job (matching savers with borrowers), but at a fraction of cost. “To me, banks are dinosaurs of the previous century,” says Rajat Gandhi of Faircent.

“Banks in India and across the world do not cover more than 20 per cent of population even in urban centres and the rest 80 per cent of the people do not have access to credit at a moderate rate of interest,” says Shankar of i-lend.

Lending amount and duration: i-lend allows you to lend as low as Rs 10,000. The bar is even lower for i2ifunding at Rs 5,000. Faircent allows you to invest a minimum of Rs 50,000. Like every investment, there are risks involved with P2P lending. “Having said that, we expect 3-5 per cent defaults or delayed payments in P2P lending. That’s why we recommend our investors to diversify, and not invest beyond 50 per cent in a single borrower. If a lender plans to invest Rs 10 lakh through P2P lending, he/she must invest in 4 to 10 borrowers,” advises Sunil Kumar, founder, LoanMeet. The tenure can vary, depending on the platform of your choice. Faircent, i-lend and Lendbox allow investment for tenures ranging from six months to 36 months. Others like i2ifunding allow you to lend for tenures as low as three months.

Eligibility & fees involved: Depending on the platform you select to be a P2P lender, you have to be an Indian resident, at least 21-25 years of age, have a valid bank account, PAN or other government Ids.

“This is not actually a fixed income product. It’s a risk product. So, we ask investors (lenders) to have a record of investing in fixed deposits, stock markets or any other investment tool through a trading or Demat account,” says Rajat Gandhi, founder & chief executive officer at Faircent.

Some platforms charge lenders a listing fee of Rs 1,500 for investing up to Rs 1,50,000. This fee is due at the time of registration. Thereafter, for every one lakh rupees invested, there is a processing fee. Some charge a listing fee of 1 per cent of the invested amount or Rs 1,500, whichever is higher. Others charge 1.5 per cent of lending amount as fees. Platforms like i2ifunding charge Rs 100 to create an investor account, wallet fees (nil up to first Rs 10,000 and then 1 per cent for additional increase). Also, as per prevalent tax laws, interest income will be taxed as regular income and the investor will be liable to pay the same. P2P lending platforms usually provide an annual interest income statement to the investor, which he/she can refer to while paying taxes.

Rates of return: According to Shankar of i-lend, interest rates are capped at 24 per cent — thereby ensuring that professional moneylenders do not use the platform. However, many others don’t have any cap. “Investors can earn interest rates as high as 36 per cent,” says Ekmeet Singh, co-founder and CEO at Lendbox.

Gandhi of Faircent says the returns you can earn by investing depend on your risk appetite. “It’s up to you to decide how much return you want, provided you are willing to take risks. You can also check the risk profile of borrowers and then take the call,” he says. But what is a good yardstick? “The lenders or investors enjoy good returns, typically more than 15 per cent, by providing personal loans to good credit-worthy borrowers,” points out Sunil Kumar of LoanMeet.

One of the big reasons P2P lending really picked up in the west was because interest rates were at an all time low (close to 0.5 per cent). Mayank Kachhwaha of IndiaLends, an online credit-underwriting and analytics platform (not a P2P lending company) says that this means that investors weren’t getting high returns on savings accounts or fixed deposits. But because of the prevailing interest rates, P2P lending presented an opportunity to these investors to make greater returns. The large difference between the FD rate and the lending rate was primarily due to high regulatory, operational and compliance costs of banks in the west.

“But in India, the difference between the risk-free rate and the lending rate isn’t that high. Banks start lending at as low as 11 per cent and the risk-free rate is closer to 8 per cent. This means that for investors to be interested in the P2P lending opportunity, the returns will have to be significantly higher, maybe closer to the 14-16 per cent mark. Add a buffer on top to account for the loss rate and the platform’s fee, the lending rate would need to be greater than 20 per cent to attract investors. But at the 20 per cent mark, only those borrowers will be interested who are not getting credit anywhere else,” says Kachhwaha, an IIT Madras alumnus.

Very few lend, most borrow: There will always be more people who want to borrow money compared to those who want to lend through P2P lending. “Banks currently reject close to 75-80 per cent of the loan applications they receive, thus leaving a large section of the population unaddressed,” says Ekmeet of Lendbox.

Some claim that about 70 per cent of the country’s population can’t get a loan due to low salary, which is less than Rs 40,000 per month. “That’s why we see a higher number of borrowers as compared to lenders on P2P lending platforms. We are slowly witnessing an increase in the number of lenders who are looking for better returns on their investments,” says Sunil of LoanMeet.

According to Kachhwaha, these platforms have very few lenders because they aren’t regulated, which leads to poor processes and poor risk assessments. This, along with the lack of lender protection leads to a lack of lender confidence, he claims.

Risks involved: This is the most important part in any investment. Higher the risk, higher is the reward. First, P2P lending in India is not regulated. “We strongly believe the RBI should regulate or at-least introduce guidance for the P2P lending space as this would ensure that there is centralized reporting to a government agency, preventing borrowers to take multiple loans without the same being recorded to the credit bureau...regulation also provides comfort to the users of P2P Lending as the presence of government oversight is always welcome in financial transactions,” says Ekmeet of Lendbox.

Secondly, unlike bank fixed deposits, there is no guarantee in P2P lending. The platforms do the verification of borrowers and conduct credit scoring using various parameters and data inputs. They also collect post-dated cheques (PDCs) as security to be used in case of late payment or default. In addition, both the borrowers and the lenders are bound by legally enforceable loan agreement. However, these loans are still subject to default risks! In case of delay in repayment, additional penal interest is imposed on the borrower which will be payable to the investor(s). Some platforms will facilitate the collections through empanelled agencies. As an investor, you may also proceed with legal proceedings on your own. i-lend has seen default rates of less than 1 per cent.

“Lending through a P2P platform comes with the associated credit risks. One of the biggest challenges in the current scenario, and in contrast to the US/UK, is the negative selection of credit risk that such platforms usually see i.e. because they are not able to lend at low interest rates, usually only the borrowers that are not able to get credit anywhere else come to such platforms. The lack of regulation also means that these platforms don’t have access to credit bureaus, leading to poor risk assessments,” says Kachhwaha of Indialends.

kumarshankar@mydigitalfc.com

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