Wednesday, 21 October 2015

Is P2P Lending for you?

A lot of discussion has happened on fintech in India and whether it can disrupt traditional financial institutions?

Fintech, in India, is at a very nascent stage and not many are privy to either the products offered or the benefits associated to them. And it is to be seen as complimenting the existing financial institutions rather than disrupting them. 

One of the products of fintech is Peer to Peer lending (P2P lending). This is in simple form is a mechanism where the borrowers connect with the lenders to fulfil their loan requirements. The virtual market place where they meet is called a P2P lending platform.

The role of the platform is to not only list the requirements and registers the borrowers and lenders, it also does the diligence on the borrowers. Some of the platforms like Rupaiya Exchange also assign an indicative credit rating to the borrowers based on the documents submitted, social profiling, and credit checks among others.

So what's in for the users to register and list the requirements? And why should someone lend money to such borrowers?

We take the case of both the borrowers and for the lenders and discuss its benefits


1. No collateral required: unlike a traditional loan, P2P loans are collateral free. Hence if you are just starting out in your career or a startup you need not worry on arranging a collateral (generally more that your loan requirement) for such as loans

2. Flexible amounts: the amount that has to be raised is flexible. For e.g. on Rupaiya Exchange one can borrow as low as Rs. 5000

3. Lowering of interest rates through Reverse auction process: it is not required to pay high interest rates on personal loans. Since the platforms act as a market place the lenders bid for loans this driving the interest rates down; thereby benefiting the borrower. A good credit rating borrower can attract lower interest rates thereby saving costs

4. Choose your own tenure: like the amount the tenure is flexible. One can borrow for as low as one month and repay the amount post that unlike some of the traditional financial institutions

5. No prepayment fee: again to ensure flexibility the repayment can be done at any point without any prepayment feed thereby saving costs

For lenders

1. Maximize returns/ better interest rates: typical rate of interest earned via such platforms is upwards of 15% and can touch upto 24% which post tax also is much higher than normal FDs and in some cases even stock market.

2. Diversification strategy: the lending provides an investment diversification option for the lenders and option for owning a new asset class

3. Credit checks: the lenders can conduct their own credit checks and ask questions from the borrowers via the platform; thereby not being dependent on any intermediary for conducting such checks. In addition, as mentioned above, some of the platforms also provide and assign credit ratings to the borrowers.

4. Choose your own investments: the lending platforms let you choose the borrowers and partly fund their requirement hence increasing the diversification and spreading the risks further.

5. Flexible amounts: the investment amounts are flexible. On platforms such as Rupaiya Exchange it starts from as low as Rs. 1000 and such amounts are to be paid only once the contracts are signed and the investor is comfortable with the entire arrangement. Hence it is not required to pre pay or deposit an account before actual investments

6. Monthly repayments and fixed cash flows: the repayment of the amounts along with interest is done on a monthly basis and such repayments are monitored on regular basis thus ensuring regular flow of income.

In global context, P2P lending is not new with players like Funding Circle, Lending Club, Zopa etc. already established in their respective geographies and credited for facilitating disbursement of millions of dollars on a yearly basis and some of them being listed on stock exchanges also.

Of course like in any other investments, there is a risk associated to default, however with prudence and adequate diversification such risk can be covered if not mitigated to a 100%.

Considering the pros of P2P lending it's about time when it is adopted by both lenders and borrowers here in India.


@RupaiyaExchange is a virtual market place for Peer to Peer Lending.
Rohan Hazrati (@HazratiRohan) is the Founder of #Rupaiya Exchange. He has worked across geographies and in his last assignment was the CFO of a multibillion dollar enterprise.

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