P2P lending machine is firing on all cylinders amid declining bank loan disbursements
P2P lending is the practice of lending money to individuals through an online platform that connects lenders with borrowers. This mode is useful for both lenders and borrowers as the former can earn a higher interest rate (than bank savings accounts or many other debt instruments) and the latter can get funds (unsecured loans) at lower interest rates than banks or non-bank financial firms (NBFCs) offer. India has nearly 20 P2P lenders with a combined outstanding loan portfolio of around 5,000 billion. These companies are regulated by the RBI.
“We make loan disbursements worth nearly 130 billion yen every month. We have grown over 30-fold over the past year, ”said Rajat Gandhi, founder and CEO of Faircent, which claims to have a loan book worth 2,000 billion yen. “Our volume skyrocketed after introducing a number of new products to both lenders and borrowers. At the portfolio level, we are able to achieve 12-15% returns after adjusting for costs and defaults,” he added .
The majority of lenders who fill the lists of well-known P2P platforms are high-yield retail investors and traders with excess cash flows. Several wealthy individuals and family offices issue large checks in favor of borrowers on these platforms. Returns 3-7% on an annual basis.
Diversifying investment portfolio
“Aside from P2P lending, there is no asset class that can deliver 14-16% annual return in the current scenario,” said V Shankar, founder and director of I-lend, a P2P platform that plans to resume operations after stopping lending withdrawals last year when the first wave of Covid-19 hit the country. “We have lenders asking us to resume operations. There is a lot of interest now. With macroeconomic factors looking good and people having ample savings from the WFH, there is a greater willingness to lend at a higher interest rate.”
For lenders (investors), granting loans on a P2P platform is a way of diversifying their investment portfolio even further. Often times they direct their stock market profits or monthly surpluses in order to generate higher returns. Many financial advisors and asset managers also advise their clients to lend on P2P platforms, but do not recommend exposing more than 10% (of the total investment portfolio) to this asset class.
Borrowers flock to P2P lenders because most banks and NBFCs have been slow in paying out personal loans to customers with relatively lower credit ratings. Also, several fintech and digital lenders (especially those that made small-ticket, short-tenure, payday loans) were taken out of business by law enforcement a few months ago for indulging in unethical collection methods to reclaim loans. This has forced borrowers to tap into the peer-to-peer network for funds. Most P2P lenders have a loan ticket size of between ₹ 50,000 and ₹ 70,000, often for a 12 month period. These loans are paid out at 10-18% interest depending on the borrower’s credit profile.
“The quality of borrowers has increased because we are also getting a lot of bank / NBFC customers these days. There is a lot of awareness about lending now, ”said Bhavin Patel, founder and CEO of LenDen Club, who currently has a loan book worth ₹ 700 crore. “Even new loan customers are familiar with various loan products. This has helped the P2P business grow significantly over the past three years. Compared to pre-Covid levels, we are now doing 12 to 15 times more transactions, ”he adds.