Peer-to-peer lending, the unique and new asset class on the Indian investment scene, is being considered by investors because of its higher returns at predictable risks. The emergence of P2P platforms has created several new investment opportunities for income-seeking investors, especially those who are ready to go an extra mile with their homework.  It is currently providing an opportunity to investors to earn a gross return of up to 18-26% per annum. Read on for a quick look at why P2P financing is stopping investors in their path.

5 reasons why investors are interested in P-2-P lending

Higher returns – The net returns (after deducting losses) falls in a lucrative range of 18% to 20% as per the Research and Analysis Report released by Faircent recently.

Risks adjusted returns – Like all other market based investments, such loans also take care of inherent risk elements. For instance, on an average, high risk portfolios would offer a gross return of 22.7% and a net return of 18.7 % after taking a loss return of 4% into consideration.

Easy tenures – In the peer-to-peer lending world, borrowers and lenders can choose from a set of easy pre-define tenures to suit their purpose. For instance, the duration of loan may vary from 6 months to 3 years.

Regular income that’s fixed – Investors can earn month-on-month returns in the form of principal repayment and interest.  This is one of the biggest advantage offered by P2P lending over stocks, MFs, SIPs, etc. Such investments have lock-in period (up to 3 years) whereas in P2P lending returns pour in every month which can be re-invested to generate compounding returns

Diversification of P2P portfolio –An investor generally invests in multiple instruments like MFs, SIPs, stocks and investing in P2P lending adds to diversification of his/her market-linked investment portfolio. Additional diversification in this loan segment can be attained by investing across borrower profiles - geographies, risk-grades, demographics and professions.

How P2P lending works

Peer-to-peer lending allows investors to extend loans to companies or individuals, and participate in large pools of loans, thereby limiting their risks. The borrowers’ credit scores are used for deciding upon the extent of risks to be taken. For instance, at Faircent, more than 120 data points are used for the in-depth screening of buyers across more than 400 parameters. This information can be used by investors for rating their perspective borrowers from minimal risk to very high risk based on their credit profiles.

How investors are gauging risks vs. rewards

Despite stringent due-diligence processes being carried out by P-2-P platforms, the risks of default cannot be negated. However, by diversifying their portfolio across credit-worthy borrowers, investors can mitigate default risk to a large extent. Lack of regulation is another concern which will be waived off once RBI come ups with its guidelines (expected soon) governing this field of financing. With the rewards for borrowers being many (such as instant funding, flexible payment terms, accessibility to loans for those with poor credit history, etc.), investors are confident of getting good returns for their money through peer-to-peer funding.

How investments in P2P are expected to grow

With different types of peer-to-peer investments joining the bandwagon – for example, professional money managers like insurance companies, banks, and private pension funds – investors can develop other non-traditional credit products to complement peer-to-peer loans. This increased participation is giving off strong signals that peer-to-peer lending is but here to stay. In a nutshell, it’s a worthwhile source of income for those desirous of controlling their actions with a higher level of risk management in place.