P2P lending machine fires high amid slow bank loan disbursements

This has never been better for peer-to-peer (P2P) lending platforms, which are seeing a huge increase in the number of people willing to lend or borrow money. While the slowdown in loan disbursements by banks and other institutional lenders has pushed borrowers to turn to peer-to-peer lenders, low yields on fixed income are prompting wealthy investors to lend money on these platforms to rates ranging from 10% to 18% per year.

P2P lending involves lending money to individuals via an online platform that connects lenders and borrowers. This mode is useful for both lenders and borrowers as the former can earn a higher interest rate (than bank savings account or many other debt securities) and the latter can get funds (loans unsecured) at lower rates than banks or non-bank financial corporations (NBFCs). India has nearly 20 P2P lenders, with a combined outstanding loan portfolio of around 5,000 crore. These entities are regulated by the RBI.

“We make loan disbursements worth nearly 130 crore every month. Over the past year we have grown over 30 times,” said Rajat Gandhi, Founder and CEO of Faircent, who claims to have a loan portfolio worth 2,000 crore. “Our volumes have increased following the deployment of a series of new products for lenders and borrowers. At the portfolio level, we are able to generate returns of 12-15%, after adjusting for expenses and defaults, ”he adds.

The bulk of the lenders who fill the lists of leading P2P platforms are retail investors and yield-hungry traders with excess cash flow. Several high net worth individuals and family offices issue large checks to borrowers on these platforms. yield 3-7% on an annual basis.

Diversified investment portfolio

“Apart from P2P lending, there is no asset class that generates annual returns of 14-16% in the current scenario,” said V Shankar, Founder-Director, I-lend, a platform. P2P form which plans to restart its operations after stopping the loan. disbursements 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 macro factors looking good and people having enough savings thanks to the WFH, there is more willingness to lend. at a higher interest rate. ”

For lenders (investors), granting loans on a P2P platform is a way to further diversify their investment portfolios. Often, they channel their stock market earnings or monthly surpluses to generate higher returns. Many financial advisers and asset managers also advise their clients to lend on P2P platforms, but they do not recommend exposure greater than 10% (of the total investment portfolio) to this asset class.

Borrowers flock to P2P lenders because most banks and NBFCs have been slow to disburse personal loans to customers with relatively lower credit scores. Additionally, several fintech and digital lenders (especially those that provided low-cost, short-term, and payday loans) were bankrupted by law enforcement a few months ago as they engaged in unethical collection methods to collect loans. This forced the borrowers to exploit the peer-to-peer network to obtain funds. The loan ticket size of most P2P lenders varies between 50,000 and 70,000 – often granted for a period of 12 months. These loans are disbursed at interest rates of 10-18%, depending on the borrower’s credit profile.

“The quality of borrowers has improved because we also have a lot of bank / NBFC clients these days. There is now a great credit awareness, ”said Bhavin Patel, founding CEO of LenDen Club, which currently has a book loan worth 700 crore. “Even new credit customers are familiar with various loan products. This has helped P2P business to grow tremendously over the past three years. Compared to pre-Covid levels, we are now doing 12 to 15 times more transactions, ”he adds.