Do you have money lying idle in your bank account? It will earn a piffling 4%, perhaps even 6%, in a year. Put it in a fixed deposit or a debt fund and you can earn 9-9.5%. But given the high inflation, the real rate of such investments is barely above the zero mark.

Can you earn higher returns and beat inflation without relying on risky stocks and shares? You can, by lending that money to individuals looking for loans. Though people have been lending to each other since time immemorial, it was completely unorganised till now. There was no paperwork (at least not the kind that is legally valid), no background checks on the borrower or even an assessment of his repayment capacity. One lent money to a business associate, friend or relative and then prayed to God that he returned it as promised

Three Ps of finance: Paperwork, Prudence, Professionalism

But a clutch of companies, such as Gurgaon-based Faircent.com, have turned this traditional funding mechanism into an organised market for lenders and borrowers. “The unorganised lending market is almost as big as the organised banking sector, but it is based on unwritten rules and loose conventions,” says Rajat Gandhi, CEO of Faircent. Faircent plays matchmaker between prospective lenders and borrowers. It screens borrowers and facilitates payments to lenders, and charges a nominal fee for its services from both parties. The company has brought the three Ps of finance--Paperwork, Prudence and Professionalism--to what was essentially functioning as an unregulated market till now.

Why lend to individuals

If you invest in a bank deposit that offers 9%, the bank makes a tidy profit by lending that money to another individual at a higher rate. Your money may eventually be used to give a home loan, car loan or a personal loan at 18-24%. Even if you account for the processing charges and other costs, the bank still makes a net profit of nearly 4-5% on your money.

Imagine a situation where, instead of going to the bank for a loan, these customers borrow from you. They will happily pay you close to 12-14% for the same money that would have earned 9% for you in a bank deposit. P2P portals such as Faircent help you meet these customers and strike a deal that is mutually acceptable to both of you.

Why borrow from individuals

Now let’s move to the other end of this telescope and see things from the borrower’s perspective. If someone needs money, he will have to shell out almost 24% for a personal loan. Even a mortgage-based loan comes for around 15-18%. But if he has a good credit history and a solid financial position, which allows him to list as a borrower on Faircent, he may grab a deal at 12-13%. “Our risk assessment process is very stringent and only lendable borrowers get listed on our portal,” says Gandhi or Faircent.

The wide difference in the rates offered by banks and P2P lenders is because in the latter case, the borrower is dealing with the lender directly. Faircent is only a facilitator and does not charge the high margin a bank levies to feed its huge overhead costs. It’s a win-win arrangement, which lets investors earn higher returns on their capital at low risk, and borrowers get access to funds at lower rates. How cool is that?