Planning to Lend via P2P Platforms? Here is What You need to Keep in Mind
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With the growing popularity P2P players, the platforms are emerging as a lucrative investment opportunity for the retail investment community.
However, we recently witnessed China taking help of state-owned asset management companies to help P2P lenders with bad loans.
This has raised an alarm across the world and investors are now expected to act cautiously.
Even though P2P players are regulated in India, if you are investor making money via P2P lending or are planning to do – here are few things to keep in mind before your clicking on the next transaction.
Take informed investment decisions
P2P lending is like any other investment, so you need to understand the category before lending.
First things first - check if the platform is RBI registered NBFC – P2P, in other words, whether they have a license to operate and do they adhere to RBI’s policies and guidelines.
Also, according to RBI warning, the entire risk of a loan resides with the lender.
“The P2P platform on which you lend cannot assure returns or provide a guarantee on the principal. It stands to reason that lenders should compare the risk v/s returns ratio with similar instruments and allocate investment amount. Lenders should also look at registering only on RBI licensed P2P platforms as they are regularly audited for transparency by the bank,” Dhiren Makhija, Co-founder, Cashkumar said to Entrepreneur India.
Additionally, he suggests entrepreneurs look for loans disbursed, average returns, disbursal cycles, delinquency and collection percentages. On the product side, it is good to understand the average loan amounts, tenure and interest rates as well as other charges.
Before investing on the P2P platform, lenders also need to understand the kind of returns they can expect post investing and the indicative risks.
Vishwas Dixit, Co-founder & CMO, Finzy advises investing small amounts initially to create a risk-optimum portfolio.
“Depending on how you diversify your investments with multiple borrowers, you can expect a return in the range of 15 per cent per annum. The lender needs to understand that the higher the return, higher will be the risk. Different borrowers will have different rates of interest and you can choose the borrowers to whom you need to lend your loan to,” he asserted.
Diversify Your Funds
Makhija from Cashkumar says never keep all your eggs in one basket- If there was any place to apply this adage then P2P lending is a perfect example.
The entire concept of P2P lending is based on crowd-funding, so no individual must bear the full risk. Platforms allow lenders to advance small amounts for each loan and create a portfolio.
“Some platforms categorize loan offers in different risk classes from low to high. A prudent strategy is to spread loans across these classes and average out the returns to create a good portfolio mix. Depending on risk appetite, lenders might want to invest more in the low-risk class as compared to high risk or vice versa,” he noted.
Defaults are one of the most important issues in the industry and one cannot ignore this fact.
Bhavin Patel, Co-Founder & CEO LenDenClub ask investors understand default rate of the player.
The default rate is a tool to understand how the P2P lending platform is delivering to lenders.
“As per RBI regulations, every registered platform has to publish their states of defaults. Lenders should avoid platform which doesn’t publish this number or numbers are very high. The preferred platform should be the one with moderate rate default,” he explained.
Furthermore, he adds that lenders should also check if the platforms are offering any Legal support in case of default. Many P2P lenders are open to sharing legal supports to lenders whereas very small platforms may not have this support