Why More People Are Willing To Lend On Peer-To-Peer Platforms

Would you loan money to a stranger? The stories of those who have.

P2P Lending. (Source: BloombergQuint)
P2P Lending. (Source: BloombergQuint)

With interest rates dropping, Kishan, a product manager at a startup, decided to try out peer-to-peer lending. These platforms connect lenders and borrowers and often advertise returns in double digits depending on the amount of risk a lender is willing to take.

Kishan, who did not want to disclose his full name for privacy reasons, decided to start with Rs 10,000.

"Most millennials like me anyway have no interest in fixed deposits", he said. "While I was aware that P2P is a high risk investment, a token amount of Rs 10,000 seemed like a reasonable investment to try out the model.

A year later, he has received only about Rs 6,000-7,000 back and does not expect to recover all of his money.

On the P2P platform he opted for, he chose a 'moderate' risk portfolio, expected to offer him 16-18% returns. The portfolio consisted of 10-12 borrowers, looking to borrow money for different lengths of time, the highest of which was 18 months. While some of his money is due later this year, two of the borrowers have already defaulted, he says. The platform still shows his rate of return at 12%, though he is unsure how that is being calculated.

"I am never again investing on a P2P platform," he said.

Mudit Gupta’s experience on P2P platforms has been a mixed bag too.

In a bid to diversify his investments, he invested about Rs 1 lakh over the course of the last one year across multiple P2P platforms.

Most platforms allow lenders to either create their own portfolio or use one offered by the platform. These platforms list borrowers, interest rates and their credit ratings, which according to Gupta, “are pretty messed up”. Lenders can allocate their investment across borrowers within a recommended range. Else, an AI-enabled ready mix of borrowers is offered.

By Gupta's experience, the profiles he selected himself performed better, while some others saw delays in payments.

On aggregate, he has not made substantial losses or gains, Gupta said.

What's Driving Increased Interest

Motivations and experiences may differ but P2P platforms claim that they are attracting more lenders than ever before.

A combination of negative inflation adjusted interest rates on deposits and a young audience willing to dabble in new investments are factors that are driving interest.

The number of lenders has grown 2.5-times since January 2020, and business is at an all-time high, said Rajat Gandhi, founder and CEO at P2P platform Faircent. Bhavin Patel, CEO and co-founder at LenDenClub shared a similar story. From January 2020 up to now, the number of lenders has risen 1100%, he said.

While P2P lenders are registered with the Reserve Bank of India, the regulator too does not release lending data for these platforms. As such, BloombergQuint could not independently verify the rise in lenders on these platforms."

Interest rates elsewhere such as in bank deposits are low. Suddenly P2P has become very attractive and there is a lot of excitement around it.
Rajat Gandhi, Founder & CEO, Faircent

Interest rates for savers holding money in bank deposits is at its lowest in at least a decade. The central bank's benchmark repo rate is at a historic low of 4%. That, together with deposit growth outrunning credit demand, has meant that bank rates have fallen. State Bank of India, the country's largest lender, is currently offering an interest rate of 5% on retail domestic term deposits for one-two years.

Given the low rates and relatively elevated inflation, the search for better returns is pervasive.

More people are also lending as the business model is better understood now, Gandhi said. Partnerships and tapping online users during the pandemic has helped the platform increase it's lender traction, said Patel.

Follow The Leaders

That business is heating up is visible in recent tie-ups.

In August, BharatPe partnered with P2P NBFCs including LenDenClub to launch the '12% Club' — which offers the payment app's consumers an option to invest or to borrow at 12% on an annual basis.

Fellow unicorn Cred also recently announced that it will partner with P2P lender Liquiloans. As part of this tie-up, Cred members can lend to each other, with expected returns in the range of 9%.

Lender traction appears to have seen a rise in the industry, said Shiva Iyer, associate partner at EY. There has also been an increase in lending limits per investors, which may have led to added traction for these platforms, Iyer said.

While the RBI previously chose to remain more cautious by restricting lending limit to Rs 10 lakh, this was raised five-fold in December 2019.

Risk annualised returns average 12-15% on P2P platforms, which is not a bad deal for individuals of high and medium net worth and salaried individuals, all of whom are looking for avenues even apart from stocks and mutual funds to invest in.
Shiva Iyer, Associate Partner, EY

On Faircent, average interest rates that lenders receive are at at about 14.5%, according to Gandhi. This, he says, is despite defaults by borrowers.

Not All Rosy

While the relatively high returns may be attractive, the risk of default remains. These defaults, in fact, may have risen just at the time that lender interest was picking up.

Rajiv Ranjan, founding director at PaisaDukan, said that with the rise in defaults because of the Covid, lender attrition on platforms remains high. Ranjan, contrary to others in the industry, said that lender interest in P2P platforms has actually come down because of the surge in equity markets and mutual fund returns.

Now, fintech tie-ups with P2P platforms may mean more risk to the sector, Ranjan believes. While NBFC-P2Ps are regulated by the central bank, many of these fintech firms are not.

In the case of P2P loans, a default from the borrower is ultimately borne entirely by the lender and not the platform. The latter, however, does facilitate recovery.

At Faircent for instance, in case an EMI is not paid on time, a penal interest is payable to the lender for each instance of delayed repayment. A non-refundable overdue charge is also levied. In the worst-case scenario, a legal notice is issued on the lender's behalf.

The rise in defaults, though, has been seen across the board and not just on P2P platforms, Iyer said. At least for the top tier P2P platforms, borrower credit underwriting is robust and these platforms have invested heavily in technology to ensure the same, he said.

An Evolving Business

Meanwhile, alongside the number of lenders, borrowers are also rising.

The number of borrowers on the platform rose five-fold since January 2020, said Gandhi, with banks and non-banks still going slow on disbursing loans to these borrowers. Lender ticket size on the platform has also risen to about Rs 3.5-4 lakhs per annum, he said, with most lenders usually in the age group of over 35 years.

P2P players are also trying to innovate.

Rang De, a public charitable trust turned NBFC-P2P platform, is now enabling lending to entrepreneurs from low-income households. There are other platforms which are listing products like inventory financing.

Gupta has found his sweet spot and now invests in P2P platforms that offer settlement financing and inventory financing. Here, his returns are more stable. “Not one single such investment has seen a default so far,” he said.