The much-awaited RBI guidelines for P2P lending platforms recognizing them as non-banking financial companies (NBFCs) have boosted online lending and encouraged retail investors to treat this asset class more seriously. India has a unique problem of too much money chasing too few customers. So at one end, we have traditional salaried class getting loan offers and at the other end, people are left at the mercy of hawkish money lenders ever-more resembling Shakespeare’s Shylock. Clearly, P2P lending and borrowing is the disruption that was waiting to happen as banks and NBFCs have successfully struggled at twin accounts of making credit affordable and accessible in a credit-hungry nation.
RBI’s recognition to the industry offers legitimacy and best practices for industry players to ensure that interests of both lenders and borrowers remain safeguarded. Record low-interest rates have hit the traditional savers hard, but not all them want to take the risk of putting all the cash in the stock markets. This conundrum has proved a blessing for P2P borrowers as lenders are more willing to invest on loans for better returns while minimizing the uncertainty or extreme volatility in returns. P2P platforms have opened lending as an asset for individuals which was hitherto a monopoly of banks or NBFCs.
P2P lending is emerging as an asset class between cash and shares and a useful new asset class to earn considerable returns on their money with taking informed and limited risk. Having said that, the emerging concern for platforms is to find enough quality borrowers to achieve scale in business and offer investors to diversify their risks. It is critical for investors to lend to a multiple pool of borrowers and re-invest the monthly EMIs received. The good aspect is that unlike the stock market where one cannot question why once-a-blue chip company’s shares tumbled, P2P lenders can take recourse to recovery. Hence more lenders and borrowers are participating in this movement of financial inclusion to enable each other to meet their financial goals effectively.
Digital lending platforms solve the twin problem of making credit accessible to borrowers at affordable rates and allowing lenders to compound their investments to earn returns up to 25% annually. Being a technology-driven platform, borrowers are extensively assessed across multiple parameters crunching over 500 data points to determine eligibility of borrowers and risk associated in lending to them.
Transparency Market Research has suggested that opportunity in P2P lending market is expected to grow at a CAGR of 48% year-on-year between 2016 and 2024. Morgan Stanley has predicted that P2P Marketplace lending is likely to command $490 billion globally by 2020. China has the largest and most dynamic P2P marketplace with over 4000 service providers. Recent regulations are bringing consolidation in the Chinese P2P lending space. Indian P2P space is at a cusp of unprecedented growth fuelled by retail and institutional lenders.
Investors are advised to diversify their investments across different classes such as equities, mutual fund, bank deposits, real estate, gold, art and P2P lending, among others. This is likely to enable them to minimize their exposure to loss and beat inflationary movements in the economy.
(By Mahendra Agrawal, MD and Director, IndiaMoneyMart)