Peer-to-peer lending industry, valued globally at $64 billion in 2015, is growing at approx. 50% CAGR. Its has established itself as an asset class delivering predictable investor returns protected from stock market volatility. The emergence of P2P platforms has created an opportunity to for income-seeking investors to diversify their portfolio with an alternative investment which was previously only available to institutional investors like banks.

Read on for a quick look at why P2P financing is stopping investors in their path.

6 reasons why investors should consider P2P lending

Higher returns – Average net returns (after deducting losses) fall in a lucrative range of 15% to 20% p.a for most lenders on the platform. These returns are highly competitive when considered against average returns delivered by other market linked investments like Real Estate, MFs and Stock market.

Risks adjusted returns – P2P lending delivers risk-adjusted returns by enabling lenders to predict risk. For instance, on an average, net returns will factor in the loss rate of about 5%-6% p.a. Responsible platforms help lenders earn higher net returns by helping them to mitigate individual risk. Faircent.com has taken many steps to help their Lenders manage inherent risk and earn more.

Easy tenures – In the peer-to-peer lending world, borrowers and lenders can choose from a set of easy pre-define tenures to suit their purpose. For instance, the duration of loan may vary from 6 months to 36 months.

Regular and stable income – Investors can earn month-on-month returns in the form of principal repayment and interest (EMI).  This is one of the biggest advantage offered by P2P lending over other market-linked investments that have lock-in period (up to 3 years).

Benefits of compounding returns – Lenders start earning returns every month which can be re-invested to generate compounding returns.

Diversification of P2P portfolio –An investor generally invests in multiple instruments like MFs, SIPs, stocks and investing in P2P lending adds to diversification of his/her market-linked investment portfolio. Additional diversification in this loan segment can be attained by investing across borrower profiles - geographies, risk-grades, demographics and professions.

How P2P lending works

Peer-to-peer lending allows investors to lend directly to companies or individuals, and participate in large pools of loans, thereby limiting their risks. Platforms pre-verify borrowers before listing them. For instance, at Faircent, a fully automated credit evaluation mechanism uses more than 120 data points across more than 400 parameters alongwith physical verification for in-depth screening of buyers and to rate them from minimal risk to very high risk based on their profiles. All information about the borrowers is transparently mentioned on the dashboard and can be used by investors for selecting their prospective borrowers.

How investors are gauging risks vs. rewards

Despite stringent due-diligence processes being carried out by P2P platforms, the risks of default cannot be negated. However, by diversifying their portfolio across credit-worthy borrowers, investors can mitigate default risk to a large extent. Watch out this section next week for more info on how to mitigate risk.

How investments in P2P are expected to grow

RBI has regulated P2P lending in India, recognizing it as an NBFC-P2P with guidelines that cover permitted activity, prudential regulations on capital, governance, fund transfer mechanism, data security, business continuity plan (BCP), regulatory reporting and customer interface apart from other operative parameters. Faircent.com was the first platform in India to receive the Certificate of Registration as an NBFC-P2P. Regulations have brought more stability and credibility to the industry boosting lender confidence.

With the rewards for borrowers being many (such as instant funding, flexible payment terms, accessibility to loans for those credit-worthy borrowers with limited credit history, etc.), investors are confident of getting good returns for their money through peer-to-peer funding. Increased participation by lenders is giving off strong signals that peer-to-peer lending is here to stay. In a nutshell, it’s a worthwhile source of income for those desirous of controlling their returns with a higher level of risk management in place.

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