Peer-to-peer (P2P) lending has emerged as a popular alternative investment avenue in India, offering individuals the opportunity to earn attractive returns by lending money to borrowers. However, like any investment, it comes with its own set of considerations and risks. In this blog, we’ll delve into the intricacies of investing in P2P platforms in India, from understanding potential returns to selecting the right platform and assessing its social impact.
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Understanding P2P Lending in India:
P2P lending platforms act as intermediaries that connect lenders with borrowers. As an investor, you can lend money to individual borrowers or small businesses in exchange for interest payments over a specified period.
Expected Returns:
The returns in P2P lending can vary depending on several factors such as the platform’s fees, default rates, and the type of loans you invest in. While historical data may indicate potential returns ranging from 8% to 15%, it’s essential to understand that higher returns often come with higher risks.
Guarantees Risks:
P2P platforms in India are regulated by the Reserve Bank of India (RBI) and are required to adhere to certain guidelines to mitigate risks. They need to have a P2P NBFC licence in order to facilitate P2P lending. Thus they need to maintain an escrow account and have a Business Continuity Plan. However, there are no guarantees provided by P2P platforms, and investors should be aware of the possibility of borrower defaults.
Manual vs. Automatic Lending:
Investors can opt for manual lending, where they select individual borrowers to lend money to, or automatic lending, where the platform allocates funds based on predefined criteria. The choice between manual and automatic lending depends on individual preferences, risk tolerance, and time commitment to managing investments.
Choosing the Right P2P Platform:
When selecting a P2P platform, investors should consider factors such as:
- Regulatory compliance and track record
- Transparency in loan origination and underwriting processes
- Historical default ratio (NPA)
- Average returns and charges
- Investor protection measures
Investment Exposure:
As with any investment, diversification is key to managing risk in P2P lending. Investors should avoid allocating a significant portion of their portfolio to P2P lending and instead consider it as a part of their overall investment strategy.
Social Impact:
P2P lending can have a positive social impact by providing access to credit for underserved segments of society, including small businesses and individuals without a credit history. By empowering borrowers, P2P lending contributes to financial inclusion and economic growth.
Conclusion:
Investing in P2P lending can be an attractive option for individuals seeking alternative investment opportunities in India. However, it’s crucial to approach it with caution, conduct thorough research, and diversify your investment portfolio. By understanding the potential returns, risks, and social impact of P2P lending, investors can make informed decisions and maximise their investment outcomes.
