The alternative investment industry has doubled in last decade in the world. It has also started getting foothold in India since last couple of years. This is a very interesting development as it has allowed more investors to reap the benefits previously reserved for institutions and HNIs. However, alternatives being new asset classes, investors need to do their homework and be well informed before investing.
Most of the alternatives require large amounts of surplus funds to be invested except peer to peer lending. Hence, this is my attempt to inform retail investors of the P2P opportunities as it is the only alternative investment opportunity available to retail investor.
P2P platforms are given license by Reserve Bank of India to run as an NBFC – P2P. An NBFC – P2P company shall not raise deposits, nor lend on its own, and shall not facilitate or permit any secured lending linked to its platform, according to RBI.
What is Peer – to – Peer lending :
Peer – to – Peer lending is a new method of debt financing that’s regulated by Reserve Bank of India (RBI) which allows you to lend and borrow money without the involvement of financial institution. Being an online portal, P2P lending generally operates with lower overhead costs as compared to traditional financial institutions or banks. As a result, borrower can borrow money at lower interest rates and lenders can earn higher returns.
What are the positives of P2P over traditional investment options :
1. Returns : Returns are low to medium in any traditional investment option (3.5% p.a. on savings account, 7.6% on PPF & NSC and maximum 7-8% p.a. on FDs ) other than equity. This shows that returns on traditional investments are lower or at par with average inflation rate i. e. 6.07%. Returns of equity investments also depend on market speculations. However, starting P2P investments are easy and earn returns as high as 25% p.a. on investments. I would also like to highlight that P2P lending also has an opportunity to re-invest the return and compound returns.
2. Risk : There are 2 types of risks the investor carries in any investment one is not getting the expected returns (where returns are dependent on other factors e.g. equity mutual funds where returns are dependent on share price of equity invested.) and the second is the higher risk, which is safety of capital invested (risk that capital won’t be returned) prevalent in any investment. In case of P2P investments, the steps are taken to mitigate both the risks (returns and capital safety)
3. Monthly income : Unlike any traditional investments the EMIs are credited to the lender on month on month basis This is a very attractive feature for low income people who have lent money on P2P platform but need money on a regular basis.
4. Minimum Investment Required : Retail investors can lend money on P2P platforms as there is no minimum investment/lending criteria. Traditional investment avenues like real estate require huge funds at one point of time. Due the fund requirement, it not a feasible investment opportunity for retail investors.
5. Liquidity : Investors need to consider the fact that P2P is a less liquid asset type before investing. Once the money is lent there is no way to liquidate. However, I would argue that all of us professionals have surplus that is not required in the short run.
6. Technology : P2P is a investment opportunity leveraged by technology to mitigate the risks and ease of operation/lending.
Ways to Optimise returns
- Invest small amounts across small borrowers
- Invest regularly o reach the portfolio required to meet your financial needs
- Re-invest to gain benefits of compounding returns
Measure Mitigating risks within P2P
- Borrowers are assessed for their ability and intent to repay loans across various parameters by platforms.
- Collection of security checks from borrowers with physical verification
- Classification of borrowers into risk profiles using expertise and technology to help you select borrowers
- Limited exposure to an individual borrower as one investor can fund only up to 20% of his/her requirement
- A vast pool of borrowers to help lenders create a diversified portfolio and reduce risks
In the conclusion, there is a lot of potential in P2P lending for retail investors as the industry is growing with increasing proliferation of digital transactions, fintech innovations, and demand for affordable credit, the P2P sector has emerged as an alternate investment and lending platform. The current size of Indian P2P market is around Rs 200 crore, and it is projected to be $4-5 billion by 2023.