Lending and borrowing money has been present in the world ever since money was introduced as a medium of exchange. Before the banking system existed, people would often lend funds to their family and friends in need. Also, money lenders were an active part of the economy back then, who would lend funds to borrowers against a collateral. As time went by, and the banking system evolved, people started approaching banks for loans who soon became the primary institutions for availing loans. However, in the last decade, with an increase in fintechs around the world, online peer to peer lending has established its roots in the financial landscape of most countries. So, what does 2018 hold for P2P lending in India?
The Traditional Banking Landscape
Before P2P lending platforms were introduced, the borrowing-lending process was centered on banks. Banks accepted deposits at a certain rate of interest and offered loans to borrowers at higher rates, earning in the bargain.
Traditional lending-borrowing cycle
Investor ->Deposits funds with a bank ->Earns returns of ~7-8%
Bank ->Lends funds to borrowers at ~15-16% ->Earns the difference between interest rates.
However, there were a few problems with this system:
In a nutshell, there was a need for the current lending-borrowing system to become more borrower-friendly. Also, investors depositing their funds in the bank were not getting inflation-beating returns and had to resort to market-linked investments.
Peer to Peer Lending platforms changed the way this cycle worked. They created a platform which enabled Retail Investors to lend funds to Retail Borrowers directly without the intervention of a bank. This solved most of the problems listed above.
Investor ->Connects with borrowers through P2P platforms ->Lends funds to borrowers ->Earns a higher rate of interest depending on the risk involved
Borrower -> Can apply for a loan even if the CIBIL score has been adversely affected for some reasons -> Pays interest proportional to his/ her credit score.
Past, Present, and Future of P2P Lending in India
P2P Lending platforms were launched in India in the year 2012. Since, then there has been a steady rise in the number of people opting for these platforms for their borrowing and investing needs. With the country surging towards a digital future, a loan available on the internet is bound to attract more borrowers.
As an investor, a primary concern is the creditworthiness of the borrowers approaching P2P platforms. While most platforms do not peg a lot of importance on the CIBIL sore of the borrowers, it is not completely ignored either. People Lend, a trusted name in P2P Lending, has a proprietary software which helps assess the risk class of each borrower by taking into consideration different parameters like the CIBIL score, location of residence, trends in expenditure, etc.
The best part is, that while borrowers can get loans at rates proportional to their risk class, investors have an opportunity of earning better returns by investing in a diversified manner. P2P lending offers a multi-level diversification possibility which can help you hedge against the risk of default to a great extent. What is means is that you can divide your funds between various risk classes based on your financial goals and risk preference. Once you have done that, then you can choose multiple borrowers within each risk class to ensure that the exposure of capital per borrower is minimal. By doing so, even if a 2/3 borrowers default, your portfolio camn absorb the losses and still offer good returns.
Also, P2P investments are not directly linked to the market performance and offer a better control to investors on their funds.
2018, seems to be a good year for P2P Lending in India. As an investor, you have a choice of selecting the borrower you wish to lend your funds to by assessing their risk class. Our only advice to investors is that they should spend some time understanding how these platforms function and start with smaller amounts. As you gain a better understanding and confidence on the platform, you can choose to increase the investment amount.