In the fixed-income investment space, the primary avenues are mutual funds and direct investment in bonds, apart from conventional ones like bank or post office deposits. But another investment avenue has emerged over the last few years: peer-to-peer (P2P) lending. In this, hitherto unknown people lend to or borrow from each other; P2P platforms or facilitation websites run by P2P players act as the bridge between people. Returns through this deployment are in double digits, which is higher than that from debt-oriented mutual fund schemes. However, here, you do not get the services of a professional fund manager as in mutual funds.
Lending and borrowing in the unorganized sector—outside of banks or non-banking finance companies (NBFCs)—has been a part of our culture since ages. The typical profile of the borrower is one who is not able to avail of bank funding, probably due to a sub-optimal credit score, but does not want to pay exorbitant rates charged by traditional moneylenders.
In P2P lending, some structure is being brought by the Reserve Bank of India (RBI). The P2P entity, which brings the lender and borrower together, cannot offer any guarantee on the loan. RBI regulation states that the P2P “shall not provide or arrange any credit enhancement or credit guarantee”, so the lender has to go for unsecured lending.
What then are the security features in this form of lending? The service provider or the P2P entity, provided it is a serious market participant, would list on the website its role, how it can help you and how they cannot help you. The guidance mentioned on their website will give you a perspective on where you stand.
Their services or requirements include, inter alia,
• Segmentation of borrowers based on credit score and income bracket, among other things. The loan rate bracket for that profile of borrowers (higher rate, higher risk) gives an indication;
• Moderate the discussion between the borrower and lender;
• The borrower may be required to obtain insurance (including personal life, permanent disability, loss of livelihood or employment) for the loan;
• Have a panel of lawyers to initiate legal action in case of non-payment of EMIs, under Section 138 of the Negotiable Instruments Act for dishonour, action under the Insolvency and Bankruptcy Code for non-payment of creditors, enforcing payment assurance, if any, among others.
Moreover, RBI guidelines require P2P players to execute the following:
• Undertake due diligence on the participants;
• Undertake credit assessment and risk profiling of the borrowers and disclose to lenders;
• Undertake documentation of loan agreements;
• Render services for recovery of loans.
There is an overall risk management in terms of exposure. RBI guidelines limit exposure as follows:
• Aggregate exposure of one lender to all borrowers, across P2P platforms, to ₹50 lakh;
• Lender investing more than ₹10 lakh across P2P platforms shall produce a certificate from a practising chartered accountant certifying a minimum net worth of ₹50 lakh;
• Aggregate loans taken by a borrower across all P2P platforms subject to ₹10 lakh;
• Exposure of a single lender to one borrower, across P2P platforms, capped at ₹50,000;
• Maturity of the loans is a maximum of three years.
The gist of the RBI risk exposure guidelines is that between one lender and one borrower, the cap is ₹50,000, exposure of one lender across the P2P mechanism is ₹50 lakh and one borrower can avail of a maximum of ₹10 lakh across all P2P platforms. RBI also requires P2Ps to become members of all credit information companies and submit data. It may be argued that borrowers who come to the P2P system would not have a high credit score, but any digression would impact the credit rating further. Another perspective on the safety or risk factor is the NPA (non-performing asset) level of the P2P platform. This data is disclosed on the respective websites; the lender should scan the data across platforms for zeroing in on which one to work with.
What we arrive at is that you can earn minimum double digit to high double digit returns on deployments through this platform. Banking sector NPA data shows that the segment with the highest level of NPAs is large corporate borrowers (approximately 70% of total bank NPAs) and the lowest level of NPAs are from retail (approximately 5% of the total). However, at the end of the day, remember that you are doing an unsecured lending transaction, which is what is leading to the higher returns.
Finally, which P2P platform(s) should you go with? The RBI website lists the approved P2P platforms; you can cross-check the service providers thrown up by Google with the RBI list, and compare their service and NPA levels.