Decoded: Should you try peer-to-peer lending to maximise your returns?

The higher the risk, the higher the return. Most modern investment instruments abide by this principle. As the world moves away from traditional financial institutions to look for alternatives offering better returns, several options are cropping up. 

We know about cryptocurrencies, their stellar returns offset with periodic cycles of high volatility. Another such modern investment instrument is peer-to-peer, or P2P, lending.

Imagine lending the money you’d typically park in fixed deposits or mutual funds to those looking for loans, and getting annual returns of 9-12% on the amount you lend. 

That’s what the new-age Indian fintech startups liek Cred and BharatPe are aiming 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-banking financial company LiquiLoans. BharatPe will carry out P2P lending via 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 instance, State Bank of India (SBI) barely pays 5.4% interest on its longest-term deposit. For senior citizens it is 6.2%. Here’s how Cred and BharatPe make P2P work for their customers. 

Money lent on Cred Mint will be spread out among 200-plus borrowers on average. “If you use the auto-invest feature, a sum of Rs 1 lakh lent on our platform will be divided among 400-500 borrowers using our algorithm,” says Bhavin Patel, CEO and co-founder, LenDenClub.

But a word of caution here: It’s important to know that P2P lending is a high-risk investment. It is an unsecured loan. So, there is no guarantee put up by the borrower for the lender to redeem in case of a default. The borrowers are those with low credit scores who find it difficult to get loans elsewhere. The unsecured nature of the loan is the reason for high interest rates

Cred mitigates the possibility of a default by lending only to customers who have been using its Cred Cash product. The company says these are borrowers with high credit scores of above 750 and low default rates. Cred founder Kunal Shah said that Cred Cash had a loan book of Rs 2,415 crore with a default rate of less than 1%. So, the company allows lenders to withdraw their amount, either in full or partially, anytime. They get the money along with the interest for the period invested within one working day.

BharatPe also promises lenders anytime liquidity with zero withdrawal charges. Most P2P lending startups also allow lenders to hand-pick their borrowers, after scrutinising their credit scores.

P2P lending isn’t new in India. In 2017, the RBI brought P2P Lending within its purview, ensuring that only the serious ones with watertight business models remained in business. 

This was also the time when the P2P lending industry was unravelling in China, with high default rates and online lending platforms being investigated by the government there for malpractices. 

Besides Cred and BharatPe, some other players in the Indian P2P lending industry are RupeeCircle, LenDenClub, Finzy, and IndiaMoneyMart.

As for some investment advice for a P2P lender, it is important to start small and scale up gradually. 

LenDenClub CEO Bhavin Patel advises first lending a sum of around Rs 25,000, then scaling it up to Rs 1 lakh to an adequate level of diversification among borrowers. 

About the time period for investment, Patel suggests investing for 12-24 months, as that is the minimum period his platform’s optimisation algorithm takes to produce decent results.