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5 April 2018

The emergence of Peer to Peer Lending in India

We have been used to the notion of borrowing from banks who earn sumptuous profits on interest arbitrage. They raise loans on lower interest and lending at much higher rates. But did you know that there are over 2 billion adults without a bank account worldwide and many more who hardly have any connection to an organized financial system? If you didn’t know, now you do.

By no surprise, this has led to the emergence of Peer to Peer Lending in India. One of the countries with a billion people in the world. P2P lending is a debt financing option enabling individuals to borrow and lend money without the presence of any regulated financial institution as an intermediary. The platforms are gaining more acceptance due to less volatility and higher yields compared to other investment options in the entire world and especially India.

India has been witnessing an unprecedented surge in P2P investing options over the past one year and for the kind of flexibility and innovative structures these platforms offer investors, one can rest assured that these options will grow manifold in the years to come.

Why is P2P lending is gaining popularity in India?

P2P platforms disburse loans quickly; post credit profiling that is in sync with real risks. P2P can form an essential part of the investment portfolio for investors due to the minimal risks involved and the assured returns.

Borrowers look for small and short-term financial help to expand their business, or for events like weddings and rituals. Financial resources are also required for term investments in real estate development and businesses. Banks seldom provide loans to the real estate sector bringing opportunity for P2P fundraising for the sector.

P2P platforms in real estate empower both the lender and the borrowers. In real estate, P2P lending enables developers to raise funds at the right time. And in turn, gives the investor returns that can outweigh other growth assets in the same asset class.

So how does P2P benefit the lenders?

Peer-to-peer lending platforms allow the investor to diversify his investment. The yields are higher and the average returns on the platform range from 18-30 percent depending on the deal.

In terms of liquidity, P2P comes with neither short-term nor long-term capital lock-in. The deal can be structured or customized as per individual requirements of the investor. EMIs can be further re-invested into traditional asset classes or revolved within the peer-to-peer loan market. The money compounds over a reasonable period.

The yield rates on the P2P platform respond to changes in the base rate. It does take inflationary impact into account to ensure that the real returns to the investor can be positive.

P2P platforms give autonomy to the investor while making a decision. The reverse auction model helps in fair price discovery of the loan. The lender decides the rate of return he is aiming for and then takes lending decisions which are highly data-driven.

Even on the risk-return pay off matrix, peer-to-peer funding is well balanced in comparison to other options the same category. In a developing economy, fixed deposit options or other standard debt options can never overcome the impact of inflation. The returns and flexibility options peer to peer lending platforms provide far outshines the benefits of these investment categories.