The higher the risk, the higher the return. Most modern investment vehicles respect this principle. As the world moves away from traditional financial institutions to seek alternatives that offer better returns, there are several options.
We know about cryptocurrencies, their stellar returns offset by periodic cycles of high volatility. Another modern investment instrument is peer-to-peer lending, or P2P.
Imagine loaning the money you would typically put in term deposits or mutual funds to those looking for loans, and get 9-12% annual returns on the amount you lend.
This is what new age Indian fintech startups liek Cred and BharatPe aim to do with their recently launched P2P lending products.
Cred has launched a P2P platform called Cred Mint in partnership with RBI-registered P2P non-bank financial company LiquiLoans. BharatPe will make P2P loans through an app called 12% Club. Such investment options obviously seem attractive at a time when interest rates on bank deposits are falling, and are currently around 5-6% in India.
For example, the State Bank of India (SBI) pays barely 5.4% interest on its longer-term deposit. For seniors, it is 6.2%. Here’s how Cred and BharatPe make P2P work for their customers.
The money loaned on Cred Mint will be distributed among more than 200 borrowers on average. “If you use the automatic investment feature, an amount of Rs 1 lakh loaned on our platform will be split between 400 and 500 borrowers using our algorithm,” says Bhavin Patel, CEO and co-founder of LenDenClub .
But a word of warning here: It is important to know that P2P lending is a high risk investment. This is an unsecured loan. Thus, there is no guarantee put in place by the borrower so that the lender redeems himself in the event of default. Borrowers are those with poor credit scores who have difficulty obtaining loans elsewhere. The unsecured nature of the loan is the reason for the high interest rates
Cred mitigates the possibility of default by lending only to customers who have used its Cred Cash product. The company claims they are borrowers with high credit scores above 750 and low default rates. Cred founder Kunal Shah said Cred Cash has a loan portfolio of Rs 2,415 crore with a default rate of less than 1%. Thus, the company allows lenders to withdraw their amount, in whole or in part, at any time. They receive the money as well as the interest for the period invested within one working day.
BharatPe also promises lenders liquidity at all times with no withdrawal fees. Most P2P lending startups also allow lenders to select their borrowers by hand, after reviewing their credit scores.
P2P lending is nothing new in India. In 2017, the RBI included P2P lending within its jurisdiction, ensuring that only the most serious ones with tight business models remain in business.
It was also the time when the P2P lending industry was collapsing in China, with high default rates and online lending platforms being investigated by the Chinese government for malpractice. .
Besides Cred and BharatPe, RupeeCircle, LenDenClub, Finzy and IndiaMoneyMart are other players in the Indian P2P lending industry.
When it comes to some investment advice for a P2P lender, it’s important to start small and build up gradually.
LenDenClub CEO Bhavin Patel advises lending around Rs 25,000 first and then increasing it to Rs 1 lakh for an adequate level of diversification among borrowers.
Regarding the investment period, Patel suggests investing for 12-24 months, as this is the minimum period needed for the optimization algorithm on their platform to produce decent results.