Currently, fixed deposit rates are at multi-year highs. Many people are investing in fixed deposits. The banks take money from depositors and lend it further to borrowers in the form of various loans.
Most banks give personal loans at interest rates in the 10-15% p.a. range. But what if you could give loans directly to borrowers and earn these high returns? Yes, peer-to-peer (P2P) lending platforms allow you to do that.
What is P2P lending?
P2P lending is a mechanism that connects lenders/investors (who have surplus money and are willing to lend it to earn interest) with borrowers (who need money and are willing to borrow by paying interest).
Various P2P lending companies bring borrowers and lenders together through their platforms. A lender (investor) can check the loan proposals from various borrowers on the P2P lending website/app. The lender can evaluate the loan proposals on various parameters and accordingly decide which borrower they would like to lend to and the amount they would like to lend. The returns for investors (lenders) on these platforms can range from 9% to 18% per annum.
RBI regulations on P2P lending
All P2P lending platforms are regulated by the Reserve Bank of India (RBI). So, it is a legal business recognised by the RBI and the Government of India. The RBI has categorised P2P lending platforms under NBFCs (NBFC-P2P). The RBI came out with a Master Directions Circular for P2P lending platforms on 9th November 2017. The circular has several measures for lender/investor and borrower protection.
Platforms offer P2P lending
Several P2P lending platforms have emerged in the last few years. They follow different business models.
They make loan proposals of individual borrowers' lives. Investors can choose the borrower and the amount they want to lend to each borrower. Also, has group loans (5-10 borrowers) based on the joint liability group (JLG) mechanism.
The returns can range from 12% to 25% per annum.
Has various options under the Faircent Double Plan, with tenures ranging from 3 – 36 months. The investor's amount is consolidated into a pool consisting of loans offered to borrowers. From there, the amount is disbursed to multiple borrowers. It gives the investor much needed diversification.
The returns range from 10 to 12% per annum.
The platform is focused on women borrowers. They form more than 90% of the total borrowers. They have various investment plans based on the borrower's risk profile (aggressive and conservative). The investor's money is disbursed among different borrowers, with each borrower getting as low as Rs. 500 from a single investor, thus giving investors diversification.
The returns range from 12 to 18% per annum.
Has the Fractional Matchmaking Peer to Peer (FMPP) Plan. The investor’s money is spread across multiple borrowers, going as low as Rs. 1 per borrower, giving maximum diversification.
The returns range from 11 to 12% per annum.
Apart from the above well-known P2P lending platforms, there are some other platforms that offer investors an opportunity to lend and earn lucrative returns. Some of these include Liquiloans, Lendbox, 12Club, Finzy, etc.
What are the risks involved?
P2P lending is a high-risk, high-return investment product. The major risk for investors involves delay or default in receiving the interest and the principal. Some platforms lower this risk by diversifying your money across multiple borrowers.
However, that still does not mitigate the delay/default risk entirely. Most platforms have an overall non-performing assets (NPAs) ratio in the 0-5%. Certain events like the Covid-19 pandemic, RBI moratorium on loan repayments, droughts or floods in rural areas, political intervention for loan waivers, etc., can increase the default risk.
Taxation of interest
By lending on P2P platforms, you earn income in the form of interest amount. The interest amount is taxed under the head "Income from Other Sources". The interest amount is added to your overall income and taxed at your slab rate.
Should you lend through P2P lending platforms?
If you are looking for an additional source of income, consider lending some money through P2P lending platforms. However, you should follow asset allocation and diversify your overall investment portfolio into various asset classes, such as domestic and international equities through mutual funds, fixed income, gold, alternative investments, etc.
You may allocate some money from your alternative investment portfolio to P2P lending. You can earn good returns in the 9 to 18% range per annum. However, be mindful of the risks, such as delay and default in repayments.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.