Planning To Lend Via P2P Platforms? Know These Five Associated Risk
P2P platform only is a facilitator to manifest contact between a lender and a borrower
P2P (peer to peer) lending that originated in 2005 has now gained popularity in many countries. The process claims to provide a common platform to the borrowers and lenders where the individuals as lenders are able to get better returns on their investment than other instruments while the borrowers are able to get the loan at a better price than market benchmarks.
The success of these platforms depends upon availability of lenders and the ongoing measures taken by these platforms to safeguard the investors’ interests. Since the individuals investing their hard earned money may not be savvy lenders, it is important for them to be aware of the risks associated with such investments.
Following are the five risks that the individual investors should know before foraying into this investment.
Lender’s money is not protected
The P2P platform is a facilitator to manifest contact between a lender and a borrower.
Any risk associated with lending to other individual is the exposure that is solely taken by the individual lender. The platform does not have or guarantee any protection on this.
Borrowers’ risk assessment process
It is very important to know about the risk associated with the borrower. All lending institutions undertake an exhaustive underwriting process to assess the risk in lending to the individual.
But here as a lender, you might be in a bit of dark. While the platforms claim to follow a diligent procedure on this front, the same is not shared with the lenders. As an individual, you may never get to know the process followed by the platform and authenticity of the risk assessment.
Also, the platforms do not share or give access to view the income or other documents submitted by the borrower and the authentication process on same.
Default and platform’s responsibilities
The traditional banks who have had decades of experience in lending also have defaults despite the exhaustive risk assessment process. To put it simply the defaults in any portfolio are a reality. So if one thinks that the repayments will be seamless and he would not make any losses, then it is a gross error.
The next question is the options available to the individual lender for collecting back the defaulted amount. In case of default, the platform may assist with a collections process but it may come with an associated cost.
Also, in case the collection efforts fail and one may want to initiate the legal process, the same may not be feasible given the lower recovery amount as against the cost of the legal process.
Since the complete transaction is being undertaken online including submission of documents, financial details, and bank details apart from the personal details, the chance of cybercrime cannot be eradicated.
In recent past, highly secured data banks of large corporations have also got compromised and consumer data has got hacked. So, one would need to evaluate the data security measures taken by the platform.
However, owing to the limited understanding on this front among masses, how far they would be able to assess this important aspect is questionable.
Legality of platform
Considering the encouraging response to the process and the ability to build an online platform overnight given the talent pool in India, there have been many flyby night operators. The risk that one carries is to invest through one of such operators.
So far the P2P platforms were out of the ambit of the structured financial environment but the RBI has in recent past has issued guidelines and asked these to register with the RBI. This will give the much-required compliance structure and control to the process.
Nevertheless, one still needs to be cautious and check if the platform is registered as an NBFC – P2P with the Reserve Bank and whether it is compliant with the central bank.
Arun is also the co-author of India's first book on Credit Scores: "Unlock the Power of Your Credit Score". The book helps people to understand the nuances of credit and also provides them with tools to harness the power of their credit score and save money.