Homecrowd lendingPeer-to-Peer Lending and its Growth in India

Peer-to-Peer Lending and its Growth in India

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Jul 25, 2022

If you are an Indian and want to invest your money, the most popular opportunities that come to mind are FDs and stock markets. While investing in stocks carries a huge amount of risk and uncertainty of market fluctuations, the returns on FDs have not been able to beat even the inflation in recent times. With the political & economic instability looming over the world today, it is too risky to enter the stock markets.

So, is there an alternative investment opportunity that can help you earn more like stock markets without any market risk? Even better, if it can make fixed interest, that can beat inflation. P2P lending or peer-to-peer lending is a brilliant investment opportunity that can provide returns up to 12% p.a. This blog discusses more on P2P lending and its growth in India.

What is Peer-to-Peer Lending?

Peer-to-Peer lending is the practice where individuals lend money to other individuals against a monthly repayment. LenDenClub offers an online marketplace where individuals can register and find listed borrowers to invest in. P2P websites often charge a nominal fee for providing this service.

These P2P lending platforms eliminate the need for a bank or financial institution, reducing the cost of lending, the bulk of paperwork, and loan turnaround time. As a result, the process of P2P lending is simple and can be completed within just a few clicks. 

Unlike banks that pay low interest on FDs, P2P platforms pass on most of the interest earned to the investors, thus increasing their overall returns.

Is P2P Lending Growing in India?

Although traditional lending methods like banks and financial institutions are still very popular, the P2P lending industry has started setting its foot in India. As of 2021, the size of the P2P industry in India has grown to over USD 2 Billion. The peer-to-peer lending growth surpassed 100% between 2017-2021.

With the onset of Covid, the P2P lending sector started seeing a boom phase as more and more people registered on alternate lending websites. At the same time, the ease of getting a loan and website-based operations drove a lot of investors toward P2P investments. 

The industry outlook and growth forecasts suggest that P2P lending can easily become a USD 10.5 Billion industry by 2026. Fintech companies like LenDenClub have disbursed loans worth over Rs. 2,500 Crores already, and the number is all set to grow.

How Does P2P Lending Work?

The fundamental structure of P2P lending is built on the base of technology. Fintech platforms are providing new and innovative solutions for the financing needs of individuals and businesses with the help of the internet. Peer-to-peer lending also works on the concept of easing the process of investments as well as getting a loan by using the internet and also eliminating the need for intermediaries like banks. It is indeed a win-win for both investors and borrowers. 

These platforms enable investors to register and find borrowers who are thoroughly screened before being listed on the P2P platform. LenDenClub considers more than 200 data points for each borrower before listing them on the website. This prudent level of borrower selection and their creditworthiness validation has gained popularity and trust amongst the investors – individuals, NRIs, and institutional investors alike. 

Another interesting feature of P2P lending is that investors only have to register and complete the KYC. After this, the AI-powered interface shortlists the borrowers based on investor preferences and starts investing automatically. Thus, you can earn a passive income without having to manage your investments. 

Your earnings are in the form of regular monthly repayments allowing you to reinvest the same and earn the benefit of compounded returns. The investment is diversified among multiple borrowers to reduce the risk of default.

Pros & Cons of P2P Lending

Here’s what P2P lending means for you as an investor:

Pros 

  • Higher interest earnings 
  • Returns are not dependent on market price fluctuations
  • Monthly repayment benefits that get reinvested and give compounded returns
  • Maximum possible diversification by lending to multiple borrowers
  • Accessible in terms of the website and mobile application 
  • A simple process of investment and with minimum paperwork

Robust P2P platforms ensure that your investment process remains as easy, seamless, and hassle-free as possible. With P2P platforms, you get access to only creditworthy borrowers, which substantially reduces the risk of payment defaults. 

Let’s understand how the P2P lending model operates in India. 

Operational Model of P2P Lending in India

Having discussed the process and working of P2P lending, let’s learn the regulatory structure of P2P platforms in India. Similar to the banking sector, P2P lending in India is also regulated by the RBI through the NBFC P2P Regulations, 2017. These directions prescribe the major points that every P2P website has to follow.

  • P2P lenders in India should obtain an NBFC-P2P license from the RBI
  • P2P platforms should appoint a trustee to manage all the transactions through an Escrow account
  • The minimum initial capital for a P2P platform is Rs. 2 Crores.
  • Every P2P platform should be encrypted to protect sensitive data.
  • The maximum amount of loan to one person is Rs. 50,000, and the maximum loan tenure can be 36 months. This helps investors secure their funds and choose whom to lend to and how much.
  • P2P platforms must send regular reports to the RBI and maintain transparency by disclosing the updated key information 
  • The P2P websites have to report the details of defaulters to the credit bureaus.
  • The grievance redressal mechanism should be disclosed on the P2P platform. 

These are the guidelines around which the P2P industry in India operates. The purpose of these regulations is to reduce the risk of the investors, safeguard their funds and protect them from fraud.

India Stack & P2P Lending

For most of the readers, India Stack might be a relatively new term as it is less talked of, but most of the online services provided by the government are managed using India Stack. 

Whether it is the issuance of Aadhaar Cards, payments through mobile with your Aadhaar number, e-KYC for banks and P2P lenders, digital signatures, Digilocker, or the UPI, all the popular services used by us daily are powered by the technology of India Stack.

Coming back to P2P lending, the most important services provided by India stack are e-KYC, e-signing of loan contracts, and UPI. Let’s look at it in detail:

e-KYC & P2P 

The biggest challenge faced by the P2P lenders is the default risk of the borrowers. As a result, it is of paramount importance to properly check the genuineness of the borrowers. With the help of e-KYC, the P2P platforms can access all the information about the borrowers and ascertain whether they are worthy enough to get listed on the platform.

Digital Signatures

The burden of maintaining manual paperwork has been completely removed with the help of e-signatures. Of course, your e-signatures are as valid as your real ones. Thus, all the paperwork required for P2P lending can be executed online without needing to be physically present.

UPI

One of the most successful schemes of the NPCI powered by India Stack, the Unified Payments Interface, has provided broader access to financial services. As a result, more and more individuals are using online transactions, also making it conducive for P2P lending to gain popularity.

Although P2P lending is relatively new, the RBI regulations have managed to give a proper structure to this industry in India. At the same time, the thorough borrower evaluation by platforms like LenDenClub makes it a relatively safe investment opportunity. With up to 12% annual returns and a low default rate between 3-4%, P2P lending with LenDenClub can be the best addition to your investment portfolio. 

Register Now to start investing!

 

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