The global P2P lending industry was valued at $64 billion in 2015. It’s estimated to be worth approximately $1 trillion by 2050. So, it can be said that Peer-to-Peer (P2P) lending is here to stay. P2P lending is a critical component of the fintech sector and has quickly become one of the most popular investment options.
It has transformed the credit-inclusive society while providing the most promising asset classes. Moreover, with the emphasis of the government on digitization and innovative fintech departments, P2P lending platforms are poised for higher growth and profitability.
As the name implies, Peer-to-Peer (P2P) lending allows individuals to obtain loans directly from another set of individuals and eliminate the need for commercial banks. A major reason for the emergence of P2P is that it benefits both borrowers and investors. Investors benefit from great investment returns, while borrowers get small-ticket loans with shorter repayment periods and low-interest rates. P2P lending platforms directly connect lenders with borrowers and set the rates, terms, and conditions to enable transactions conveniently. With the help of P2P lending, borrowers can get loans for debt refinancing, business expansion, education, etc.
P2P lending is conducted through specific platforms. Individuals open their accounts on the platform as lenders or borrowers. The platform evaluates the borrowers on various aspects like employment, credit history, income, etc. Using advanced technology, the platforms also capture the habits of borrowers like app usage, social media activities, etc. Based on the assessment, the creditworthiness of the borrower is decided and assigned to the relevant risk bucket.
Lenders can access this evaluation by the platform and pick the set of borrowers they want to lend their money to as per the risk and returns. The P2P platforms charge fees from lenders and borrowers for their services.
As Peer-to-Peer is a form of lending, it comes under the rules and regulations of the Reserve Bank of India (RBI). For example, if any company is looking to offer P2P lending services to customers, it is mandatory to register for an NBFC-P2P license from RBI. RBI guidelines provide all the information to keep the details of borrowers and lenders safe. They also cover the details about servicing loans for the decided tenure.
However, it’s noteworthy that despite several regulatory measures of RBI to reduce lending risks, the P2P lending investment is not entirely risk-free.
Unlike stocks, bonds, or mutual fund fluctuations, P2P lending is not attached to market risks. So, the value of investments in P2P lending does not fluctuate on a daily basis. The primary risk in P2P is the risk of payment default by the borrower, i.e., if the borrower does not pay the principal amount and interest.
In case of default by the borrower, the P2P platform assists the lenders in recovery, and a final legal notice is sent to the defaulter. But the platform does not guarantee the recovery of money by the lender. So, the lenders completely depend on the risk assessment of customers. While investment diversification across high-creditworthy borrowers can be a great strategy to minimize risk up to some extent, it does not make P2P lending completely risk-free.
Like any other investment, the earnings from P2P lending also depend on the risks you can take. The risk can be measured on the creditworthiness of borrowers and the tenure of lending. The longer the lending period, the higher returns that the investors can earn. There is no industry data to indicate investors’ earnings from P2P lending platforms, but on average, there are earnings of 12-14% in the investment period of one year.
There are two key considerations while looking at the P2P lending returns, i.e., platform fees and default interest rate. The actual returns can increase or decrease due to these factors.
Despite some risks, earning potential via P2P lending platforms is great. When banks provide around a 5% interest rate on a fixed deposit of one year, P2P lending allows an attractive earning of 14% per annum on your investment.
If you are also looking to get started, now is the time to create a unique experience for your customers and enable appropriate technology to ensure cheaper, faster, and safer loan processing. Consult your business goals with us.