P2P lending today is a widely accepted new-age investment opportunity delivering stable and high returns globally. Though it’s a risk-based asset class, lenders can take numerous steps to mitigate risks.

Here are some of the measures that can be taken to mitigate risk:

1. Know your Platform

In India, P2P lending is regulated by the RBI which introduced guidelines in October 2017 specifying the framework within which P2P lending platform could be established and operate. Considering the trial and tribulations faced by the P2P lending sector in China, regulations in India have been welcomed with open arms. Removal of regulatory ambiguity in any sector leads to increased lender confidence since they provide structure and credibility to it. Thus, its important to select the platform that is compliant and within the regulatory framework. Faircent was the first platform in May 2018 to be issued the CoR (Certificate of Registration) as an NBFC-P2P by the RBI.

2. Know your Borrower

The biggest risk in lending is the risk of default. There are broadly two types of risk of default – intentional and of capability.

A borrower may be capable of repaying but may intentionally default on his repayments because he may believe that he can get away with it. As a certified NBFC-P2P, Faircent.com reports all delayed payments and defaults to the credit bureaus on a monthly basis. Defaults lead to lower credit score that negatively impacts a borrower’s financial credibility an ability to take future loans. Hence, reporting to the bureau acts as a deterrent to those who willfully default.

A responsible P2P lending platform takes various steps to understand the intention, stability and ability of the borrower to take and service a loan. Faircent uses more than 400 data points and assesses the same 120+ parameters to understand the borrower before listing them on the platform. Physical verification is undertaken at the borrower’s office and residence.

However, at times due to the unforeseen circumstances even with the best of intentions, a borrower may become incapable of repaying timely. This information gathered is transparently displayed on the Borrower’s listing. Lenders should take informed decisions when offering loans.

3. Know your Portfolio

One of the most critical steps that help diffuse risk is to spread it. This can be done by diversifying investments across loans. Investopedia defines diversification as risk-management strategy. The basis is not to put all the eggs in one basket. Diversification in P2P lending protects lender investment from risk caused due to exposure to only a few loans or to loans of limited expanse.

Faircent.com is a pioneer of the Indian P2P lending sector and has been in operation for the last 5 years. With access to data analytics like no other Indian platform, Faircent has launched a plethora of loan products aimed at helping lenders choose from personal to business loans, short-term credit line for small businesses to working capital loans and even loans focused on specific sections such as young professionals or working women.

Further, with it’s simple online, pan-India presence, thousands of borrowers register on Faircent.com every month. The automated credit evaluation process helps classify the loans from high to low risk. The sheer loan numbers spread over high risk-high yield to low yield but low risk, enable lenders to diversify their investments across these loans and reduce risk.

A smart way to reduce risk in P2P lending is to build a diversified portfolio by spreading small investments across a large number of loans spread over different yield and risk parameters, gender, location, loan purpose, age etc.

4. Know your Processes

Fractionalization, wherein lenders can invest as low as Rs. 500/- per loan on Faircent.com and Auto-Invest – an automated mechanism that invest on behalf of lenders in loans that meet pre-set criteria are some of the processes that lenders should make the most of.  

Such processes help lenders reduce risk by building a diversified portfolio in a faster and more efficient manner.

5. Know your Returns

It’s important to understand how returns are calculated in P2P lending. NAR or Net Annualized P2P lending is like a fixed income instrument, where returns are received monthly. Hence, Net Annualized Return (NAR) is the internationally acceptable measure for calculating returns from P2P lending platform. NAR is used by most fixed income instruments, globally. Understanding how returns are calculated help lenders track them, do course corrections and take steps to manage risk so that NAR is not affected negatively.

Tools such as wealth builder, risk tolerance calculator available on Faircent.com help lenders build an efficient portfolio as per their risk appetite. Reports such as Temporal and Positional Distribution of Portfolio and Platform NAR comparison available on the dashboard of lenders investing through Faircent.com help lenders understand their returns from the platform and do course correction where necessary.

Mitigating risk is an integral part on increasing returns from market-linked asset class. P2P lending is here to stay and adding the same to an investment portfolio leads to diversification of portfolio thereby reducing risk from exposure to only a few asset classes. This is especially critical since unlike mutual funds, SIPs and stocks, P2P lending delivers more stable returns protected from stock market volatility.