Personnel Finance: P2P Lending as an Alternative Investment Source for Individual Investors Date:   Tuesday , October 25, 2016 Headquartered in Mumbai, LenDenClub is an Indian P2P lending & borrowing platform that enables individuals to both get quick personal loans, or to become a lender and earn better interest on their savings. Personnel Finance in India has evolved over the last few decades. Just a generation ago, it was challenging for our parents to build personal assets. Banks in India at that time did not see individuals as worthy borrowers until the end of the last century. The only options of funding unexpected demands for money were friends and relatives, or the friendly pawn-broker with whom gold could be pledged, or in case of large ticket expenses taking a loan against the provident fund was a common practice. Unorganized money lenders were the last funding options, that were available at exorbitant interest rate. Contrast to the times when our parents lived, today an individual has multiple funding means for different type of requirements across age groups. An entire range of EMI-based products are offered by financial institutions at a reasonable interest rate for consumption. From disposable perspective too, low inflation and a growing economy have meant better job opportunities, higher income and a better ability to save. Even though times have changed the relevance of lending money to friends, relatives or familiar individuals still persists in India, but in a much evolved organised form which is called Peer-To-Peer (P2P) lending. Such is the popularity of P2P lending in India that RBI recognizing the importance has released a consulting paper recently and has initiated the process of regularizing the P2P lending under NBFC category. What Makes P2P Lending Different From Other Investment? Peer-to-Peer lending facilitates individuals having extra money towards lending directly to the needy borrowers, or participate in pooling loans for a fixed duration of time at a mutually agreed terms & condition. It provides a win-win situation for both lenders and borrowers due to absence of intermediaries with no processing cost. So let�s understand what makes P2P lending popular in India, despite multiple funding and investment options available to individuals in today�s time. Lenders Dilemma: With base interest rate revised downward, safe investment options for individual investors have been declining over the period of time. Recently, RBI further curtailed Repo Rate by 0.25 percent to 6.25 percent, the lowest repo rate in the last six years. As a result, the 10-years 6.97 benchmark 2026 bond is trading almost 10-30 basis points lower from the time it was issued and is expected to decline further in the near future. Interest rates scenario in other savings instrument is not different; the savings deposit has remained constant at four percent from 2015-16 and Interest on Small Saving Schemes (Time Deposits, Recurring Deposits, Senior Citizen Savings scheme, Monthly Income Scheme, National Saving Certificate, Public Provident Fund, Kisan Vikas patra) for the third quarter of financial year 2016-17 has also been curtailed by 0.1 percent in its latest notification issued by Government. The current rates in the small savings scheme have declined by 1.2-1.8 percent compared to interest rate prevailing in FY 2015-16. The low-interest creates a challenging scenario for individual investors who now have no choice but to explore risky investment options. Under the current scenario, conventional nature of P2P lending has driven them to invest their excess cash as an alternative income source that could work out well for those who take the time needed to understand the risks and rewards. Borrowers Dilemma: As a financial transaction happens amongst two individuals, borrower participation plays a key role in the growth of P2P lending. In conventional lending and borrowing transactions, the process from loan initialization-to-scrutiny-to-final procurement remains time consuming. Borrower�s request also gets rejected citing reasons like small loan amount, unjustifiable purpose, absence of any bank history, insufficient sanction amount, and so on and so forth. This is exactly the reason borrowers opt for alternative source of funding despite lower lending rate prevailing in India. The country has around 30 million people who earn less than Rs.40,000 per month. These reliable and creditworthy borrowers are called as �Missing Middle Borrowers� as they don�t get credit from banks or micro-finance companies. How Safe Is P2P Lending For Individual Investors? Individuals have to register their profile as lender and borrowers on a P2P lending platform. With reference to borrower�s repayment credibility which remains a key concern for lenders, every P2P lending platform has incorporated a mechanism to check payment eligibility. Post scrutiny of Borrower�s basic details, his/her bank statement is scrutinized reviewing individuals default history, loan repayment details, expenditure trend and consistency related to cash flow in hand. Credibility of reviewing bank statement remains quite high, as the entire review process in most P2P lending is done through an automated process. The automated process provides a rating based on capability of borrowers to repay the required amount. A closer rating to 100 points enjoys lower interest rate compare to rating around 55 points. The process facilitates Lenders in making investment decision. In addition to above, few P2P lending platforms like LenDenClub and i2i funding also participate in the lender�s principal losses, if any, by creating a separate pool of money under Lender Protection Fund (LPF) or some other name. The LPF amount normally gets disbursed only after defaulter is declared through court process. Taking this further, several P2P platforms are tying up or considering to tie-up (after RBI issued guidelines on such cover) with insurance companies towards offering cover for borrowers against unforeseen events that can affect loan repayments. Recently Venture Catalysts-funded i2i Funding has partnered with HDFC Life Insurance to offer insurance plans to borrowers. Hence, Lenders surely have back-up towards safeguarding their investment. For lenders, the second biggest factor of safeguarding his/her investment is to diversify lending. Ideally in P2P Lending, lenders divide their portfolio among many people. It could be as small as two percent per borrower. This strategy makes sure that your overall returns will not be down if a couple of borrowers falter their loan payment. What is the Investment Return in P2P Lending Currently? Best part of investing in P2P lending is, one can invest in multiple funding options at the same time and diversify default risk. Compared to other investment options, in P2P lending, an investor receives regular inflow in installment each month. Second advantage is that irrespective of geographical distance, Lenders and Borrowers do enter into an agreement as per terms and condition convenient to both. On majority of the platforms, P2P Loan rates vary between 12-36 percent; however, one can expect default adjusted rate of return of around 20 percent. Default adjusted rates are the rate after removing default probability from the offered rate. This is comparatively higher than any other investment source even investment in equity stock if compared according to the risk factor. Currently, P2P Lending tops the returns chart with huge margin when compared with returns from other investment instruments over the period of five years.