Earlier this month, Fi, a neobank announced that it would offer P2P loans to its customers with yields of up to 9%. Fi is just the latest fintech player to enter this space. In August-September 2021, two other companies – Bharatpe and Cred – made similar announcements regarding the launch of P2P lending.
P2P, or peer-to-peer, lending involves a digital platform bringing together borrowers and lenders, essentially playing the role of a bank. Since the process excludes the middleman role, P2P allows lenders to earn a slightly higher return than bank FDs. Interestingly, a message on Bharatpe’s 12% club app states that it will “reopen soon” for new investments while existing investors will continue to receive refunds. Typically, fintechs allow investors to access their money within hours or 1-2 business days. This is made possible by holding a certain amount as a buffer and betting that not all investors will redeem their money all at once.
“CRED Mint has no fixed lock-up periods, providing liquidity to members through our marketplace by allowing them to instantly request withdrawals after 7 days and earn interest for the duration saved,” a spokesperson for CRED Mint said. CRED.
P2P lending is regulated by the Reserve Bank of India. Only non-bank financial companies (NBFCs) that have a P2P license can provide such loans. Fintechs usually partner with NBFCs such as LenDenClub or Liquiloans. The maximum duration of this type of loan is 36 months. We can lend to the maximum ₹50 lakh on all P2P platforms. People who lend more than ₹10 lakh in P2P must produce net worth certificate of more than ₹50 lakh from a chartered accountant. However, an investor’s exposure to a single borrower may not exceed ₹50,000.
How it works
P2P loans are personal loans and they usually pay an interest rate of 20-24%. These types of loans are taken out by individuals for purposes such as investing in their business, renovating their home, or family expenses like weddings. Borrowers are usually the self-employed or employees of the unorganized sector since employees of large companies can usually obtain personal loans from banks at lower rates. From the interest earned on the loans, a certain percentage is retained by the P2P platform (NBFC) and by the fintech platform, leaving the residual amount to the investor. In the case of Bharatpe, this amount is 12%, while in the case of Cred and Fi, it is 9%. Platforms like Fi and CRED say they filter out lower quality borrowers from the borrower base of P2P platforms. Therefore, the investor’s return is also lower. “Money invested in CRED Mint is lent to the community of trusted CRED members through CRED Cash, a CRED loan product. All CRED members have a credit score above 750. Members benefit from the elimination of commissions, inefficiencies and other overhead costs that eat away at typical returns and thus earn higher returns in the process,” said said the CRED spokesperson.
As a P2P investor, your returns depend on this simple math that goes awry due to rising defaults. P2P loan portfolios have NPA or non-performing asset rates. As long as the NPAs can be absorbed by the NBFC or fintech in the spread (the difference between the lending rate and the borrowing rate), the investor’s return is not affected. According to the Liquiloans website, gross non-performing assets as of March 31, 2021 represented 0.4% of the portfolio. This peaked at 0.6% in September 2020. For Lendenclub, the website shows a default rate of 3.48%. This figure peaked at 5.86% in the first quarter of fiscal 2021. The very different displays of risk suggest the absence of a standard calculation methodology. The Liquiloans website goes on to suggest that the NPA rate should be read cumulatively, over a loan cycle. For example, if the NPA rate is 5% for one quarter and the loan cycle is 2 quarters, you must deduct 10% of your return. “The credit default rate granted through CRED Cash has always been below 1%, the lowest among all existing credit providers. The money is also distributed among more than 200 borrowers to diversify and reduce risk,” the CRED spokesperson added.
P2P platforms argue that the risk levels are manageable despite the high interest rate. According to Bhavin Patel, CEO of LenDenClub, P2P platforms source borrowers from a variety of locations, including their own websites and apps, as well as other digital apps. The 20-24% interest rate is only marginally higher than what NBFCs charge, he added. “It does not follow that these borrowers are subject to default. P2P borrowers are generally low ticket size borrowers. The average size of our banknotes is approx. ₹20,000. These borrowers are not interest rate sensitive. Instead, they focus on the absolute amount they must repay. For example, 24% on a loan of ₹20,000 is ₹400, an amount that borrowers do not consider onerous,” he said. As an investor, however, this remains a high-risk product. If you’re interested in dipping your toes into it nonetheless, limit it to a small portion of your wallet.