Manual vs. Automatic Lending in India’s P2P Lending Market
Peer to Peer lending (P2P)
May 7, 2024
A bank fixed deposit pays 6% to 7% before tax. The bank lends that same money out as personal loans at 12% to 16% or more. The spread of 5% to 10% is the bank’s revenue, earned by deploying your capital.
You still carry risk for that lower return. Deposit insurance covers only ₹5 lakh per bank, so a larger FD balance is effectively uninsured.
Peer-to-peer (P2P) lending removes the bank from the middle. You lend directly to vetted borrowers through an RBI-registered platform, earn the interest they pay, and spread your money across many small loans instead of one institution. This piece looks at what that spread is worth after defaults, fees and tax, and what you give up to get it.
What your deposit insurance actually covers
Under the DICGC Act, each depositor is insured for up to ₹5 lakh per bank. That limit covers principal and accrued interest together, across every savings, fixed, current and recurring account held in the same name and capacity at that bank.
The ceiling was raised to ₹5 lakh in February 2020, from ₹1 lakh that had been unchanged since 1993. The bank pays the premium, not you. If a bank is placed under RBI’s All-Inclusive Directions, settlement can take up to 90 days.
For anyone with a meaningful fixed-income allocation at one bank, the depositor earns less than half of what the bank makes on that money and still bears residual credit risk above ₹5 lakh.
Where the demand comes from
India’s personal loan market grew from ₹2.96 lakh crore in March 2015 to ₹17.33 lakh crore by April 2026, according to RBI data. Personal loans went from 20% to 25% of scheduled commercial banks’ household credit over that period.
Fintech NBFCs processed over 10.9 crore personal loans worth ₹1.07 lakh crore in FY2025. By volume, that is roughly 74% of personal loan originations, according to the India Brand Equity Foundation (IBEF).
Not every borrower gets a bank rate. Here is what unsecured credit typically costs:
| Borrowing channel | Typical rate for an average borrower | Context |
|---|---|---|
| Credit card revolving debt | 36% to 45% | Most cards charge 3.3% to 3.75% a month, not linked to the repo rate |
| NBFC personal loans | 13% to 24% | Small-ticket and subprime segments can reach 30% or more |
| P2P platforms | 14% to 22% | Effective cost is higher with 2.5% to 8.5% processing fees; ₹10 lakh borrower cap across all platforms |
| Bank personal loans | 10% to 16% | Fell after 125 bps of cumulative repo cuts through 2025 |
Source: published rate cards of public and private sector banks, NBFC product disclosures, 1 Finance Magazine.
P2P borrowers sit between bank personal loans and credit card debt. For the borrower, a P2P loan can replace more expensive debt.
Take someone carrying two credit card balances at 40% and an NBFC loan at 30%. If approved on a P2P platform, they could consolidate into a single loan at 14% to 20%. That one EMI cuts their interest and the number of payments they have to track. That repayment economics is what the investor’s return rests on.
What an investor earns, before and after the 2024 reset
Before August 2024, most platforms smoothed investor returns. They charged borrowers 18% to 24%, passed 8% to 12% to lenders, and used the rest to cover defaults and earn margins. RBI banned that model. Credit risk is now visible and borne directly by the lender. Counterintuitively, that has improved actual returns.
| Return metric | Before the August 2024 rules | After the August 2024 rules |
|---|---|---|
| Advertised gross returns | 10% to 18% (“up to 12% assured”) | 12% to 18% (potential, no guarantee) |
| Actual gross returns | 9% to 12% | 12% to 18% (well-diversified portfolio) |
| Impact of NPAs | 0% to 2% | 0% to 2% (disclosed and borne by the investor) |
| Platform fees | 1% to 3% | 1% to 2% (fixed and disclosed) |
| Net return, pre-tax | 8% to 10% (defaults absorbed by platform) | 11% to 16% |
| Net return, post-tax (30% slab) | 6% to 8% | 8% to 11% |
Source: 1 Finance Magazine estimates based on platform disclosures and Income Tax Act provisions. Individual platform returns vary. Post-tax figures assume a 30% slab without surcharge or cess.
P2P interest is taxed as “income from other sources” at your slab rate.
How it compares with other fixed-income options
| Product | Pre-tax return | Post-tax return | Risk level | Main risks |
|---|---|---|---|---|
| Fixed deposits | 6% to 7% | 4% to 5% | Low | Counterparty, inflation |
| Government bonds | 6% to 7% | 4% to 5% | Very low | Interest rate |
| Arbitrage funds | 6% to 7% | 5% to 6% | Low | Basis, liquidity |
| Debt funds | 7% to 9% | 5% to 6% | Moderate | Interest rate, credit |
| Corporate bonds (A and above) | 8% to 10% | 6% to 7% | High | Credit, interest rate |
| Securitised debt instruments | 10% to 12% | 7% to 9% | High | Credit, prepayment, liquidity |
| Invoice discounting | 10% to 12% | 7% to 9% | High | Credit, counterparty, liquidity |
| Corporate bonds (BBB and below) | 10% to 14% | 7% to 10% | Very high | Credit, interest rate, liquidity |
| P2P lending | 11% to 16% | 8% to 11% | High | Credit, liquidity |
Post-tax returns assume a 30% slab without surcharge or cess, and 12.5% for arbitrage funds (₹1.25 lakh LTCG exemption not considered). Source: 1 Finance Magazine.
P2P offers the highest post-tax range in the “high” risk tier. Fixed deposits and government bonds are safer but deliver roughly half the post-tax yield.
Diversification is the safety mechanism
The old objection to P2P is that lending to individuals is risky. A single default could wipe out a large part of a lender’s capital. That was true when there were no exposure limits.
RBI now caps each lender at ₹50,000 per borrower across all platforms. An investor deploying ₹10 lakh is therefore spread across at least 20 borrowers. In practice, platforms let lenders allocate much smaller amounts. LenDenClub, for example, allows ₹250 to ₹500 per borrower and suggests starting with about ₹1 lakh. At that level of diversification, an individual default becomes a statistical cost built into the return, not an event that ends the portfolio.
Diversification matters more than recovery for a simple reason. When EMIs are missed, platforms chase repayment through in-house collections, auto-debit mandates and reminders, escalating to recovery agencies and legal action. But on a ₹5,000 to ₹10,000 loan, the cost of legal recovery can approach or exceed the principal. Spreading money thin is what protects the lender.
One platform’s numbers show the range. LenDenClub reported an NPA of 3.5% as of February 2026: 4.1% on personal loans and 3.3% on merchant loans. Its co-founder told 1 Finance Magazine that lenders on closed loans have historically earned 15% to 20% a year in gross interest, varying by portfolio, and that this should never be read as a guaranteed return.
The risks you take on
Credit risk is real, and the wider market shows stress.
- Microfinance, which overlaps with P2P’s near-prime borrowers, saw gross NPAs rise to 16% by March 2025, from 8.8% a year earlier (RBI Financial Stability Report).
- Borrowers holding five or more active loans rose 17.2% year on year as of June 2024 (TransUnion CIBIL).
- RBI flagged that about 11% of borrowers taking personal loans under ₹50,000 already had an overdue personal loan.
- Unsecured advances made up 53.1% of new retail NPAs in H1 FY2025 (RBI supervisory data).
Liquidity is limited. P2P loans are held to maturity, and there is no early exit. Monthly EMIs return your capital gradually, but you cannot recall principal before the loan’s tenure ends.
It is not a SEBI product. P2P lending is regulated by RBI as a lending activity, not as a security. SEBI’s December 2024 amendment to the Investment Advisers Regulations lets registered advisers advise on products outside SEBI’s purview. They must disclose that no SEBI recourse is available for grievances about those products. Due diligence rests with you and your adviser.
P2P fits best as a medium-term allocation for someone with adequate liquidity elsewhere. It is not for an emergency fund or for money you may need at short notice.
Four checks before you lend
- Is the platform independently verifiable? Look for NBFC-P2P registration on RBI’s list and published NPA disclosures. Look for an escrow structure with a bank-promoted trustee, credit bureau reporting, and compliance with RBI’s November 2025 Directions.
- How is underwriting done? Good platforms use income, bank statements, repayment capacity and FOIR (fixed obligation to income ratio), not just a credit score.
- How thin is your exposure per borrower? No lender can put more than ₹50,000 into any one borrower across all platforms, and smaller is better.
- Do you have liquidity elsewhere? Treat this money as locked until the loans run off.
The spread that banks have kept for decades is now accessible to an individual lender, inside a framework that caps exposure and separates the platform from your money. The return is real, and so is the credit risk that earns it.
Source: “How P2P Lending Unlocks the Spread Banks Have Kept for Decades”, 1 Finance Magazine, June 2026 (Issue 11). Data from RBI, IBEF, TransUnion CIBIL, platform disclosures and published lender rate cards.
