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Here’s Why Peer to Peer Lending Should be Part of Your Investment Portfolio

In general, most investors are attached to a particular investment or asset class. It might be gold, fixed deposits, or stocks, to everybody his own. However, keeping all your eggs in one basket is often a risky proposition. In case, the asset you have singularly invested in starts giving poor returns, all your efforts at wealth creation become futile.

That’s why portfolio diversification is an important first step for every investor. Portfolio diversification helps you offset the volatility and balance out returns over a period of time. Portfolio diversification ensures that returns do not always mirror market fluctuation and are able to hold steady even in low interest rate environments and bear markets.

Diversifying an Investment Portfolio through Asset Allocation

By spreading your savings across a range of asset classes which are not correlated to each other, namely stocks, fixed income, real-estate, gold, etc. you can minimize the risk factors significantly. For example, if the equity market is showing heavy fluctuation then your gains from fixed income investments, can help offset that imbalance.

Asset allocation mainly depends on an investor’s appetite for risk. For example, equities are considered a high-risk, high-return investment. But again, holding one type of equities can raise the risk-factor manifold, so you should try to diversify within an asset class as well.

Investing in Peer-to-Peer Lending

Peer to Peer lending (“P2P lending”) by matching investors (aka lenders) with potential borrowers, throws open the personal loan asset class, which has traditionally been accessible only to banks, to individual investors who are willing to lend for better returns. P2P platforms take care of borrower sourcing, screening and grading which ensures that investors are able to make educated lending decisions in line with their appetite for risk and return expectation.

Peer-to-peer lending is emerging as a lucrative investment option for Indian investors looking for a short term, fixed income investment that has the ability to generate comparable or better returns than equity.

In India, Peer-to-Peer lending as a concept has seen a relatively late arrival. Western economies are already past the P2P boom whereas China is currently the largest P2P lending market in the world. India, with its 1.3 billion plus population and tag of world’s fastest growing major economy, has a considerable appetite for both credit and wealth creation. P2P lending can become one of the key drivers of the Indian growth story, giving domestic investors a unique opportunity for passive income generation while simultaneously funding the ‘Indian dream’ by expanding financial access to creditworthy borrowers who are under serviced by banks.

Here are the reasons why Peer to Peer lending should be a part of your investment portfolio.

Simplicity and full control:

The fundamental difference in Peer to Peer lending is that it values an investor’s risk appetite and gives him full choice to invest in loans that mirror his preferences. This is quite different from say Mutual funds, where portfolio performance ultimately comes down to the acumen and dexterity of an individual fund manager. In P2P lending, right from choice of return to the period of lending, the lender gets full autonomy in deciding the structure of his lending portfolio.

In addition, unlike equity investments, which come with a certain amount of complexity and volatility, P2P investments are fairly simple to operate with requiring only periodic portfolio management checks as the P2P platform takes care of all other nitty gritty right from repayment collection to borrower sourcing.

Higher Risk adjusted Yields:

The obvious reason P2P lending is gaining popularity is because of its ability to offer higher risk adjusted returns. A P2P lender can earn upwards of 15% per annum on investment which is at least two times higher than comparable fixed income investment opportunities available today. When you compare the interest rate for a fixed deposit (6%) with the average interest rate on a P2P loan (16% or more), the picture becomes clearer.

If you have been investing heavily in bank fixed deposits, switching part of your portfolio to P2P lending can double your return potential.

Managed Risk:

Now, one might argue that higher returns means higher risks. Well, that is not necessarily the case with Peer to Peer lending. P2P lending is not like investing in equities, where your investment flourishes or diminishes as per market trends. The risk however is that loan default can occur.P2P platforms like Monexo have built a robust risk mitigation infrastructure focused on ensuring that default risk for lenders is minimal. Loans are offered only to vetted, verified salaried borrowers who are subjected to rigorous credit risk assessment using 150+ traditional and nontraditional data points. And what’s more – repayment performance is reported into credit bureaus like CIBIL which ensures borrowers who do not make timely repayments are severely penalized through a credit score downgrade which will adversely impact future ability to borrow.

Borrowers who delay payments are also pursued through approved collection and recovery practices which can start with field visits and go all the way to full-fledged legal action if payment is not received post follow-ups.

Now despite the robust screening and repayment collection process, there is still a possibility that a borrower may not be able to repay dues on time. Hence the bedrock of risk mitigation in P2P lending comes down to the building a diversified loan portfolio. By investing in small amounts across multiple loans, lenders are able to ensure that their capital is not locked up majorly in any specific loan. Such large-scale diversification of lending ensures that even with a few NPAs, the lender’s portfolio continues to generate rewarding returns.

Regular, monthly Earnings:

Peer-to-Peer lending stands out as a differentiated offering for investors as it provides for a steady stream of monthly income. As the amount lent through the P2P platform gets repaid in the form of monthly EMIs (principal + interest), the lender can use this monthly cashflow to further reinvest and compound earnings or withdraw it to the investor’s bank account periodically. As a simple illustration, a Rs. 10 lakh investment that is lent through a P2P platform for a period of say 36 months at an interest rate of 18% p.a. can generate a monthly cashflow of nearly Rs. 30,000 for the investor. Isn’t that awesome?

Shorter investment Horizon with Increased Liquidity

Peer to Peer lending does not require your capital to be locked up for years together to be able to generate high yield. Since loans typically come with a tenor of 6 – 36 months with monthly repayment, P2P lending is a rare investment where the lender’s money begins to come back from the very first month of investment. Again, by diversifying your P2P lending portfolio, you can spread your investment in a flexible manner, ensuring that your money is never sitting idle but is still there when you need it.

Wondering how you can invest in Peer to Peer lending loans?

All you need to do to become a lender is open a lender account with a P2P platform. There are quite a few P2P platforms out there so make sure to choose yours diligently. Some key metrics you should look at closely before deciding on the choice of platform is the platform’s promoter team, borrower credit assessment process, Escrow account availability and track record of returns.

Monexo is one of India’s leading and fastest growing Peer-to-Peer lending platforms trusted by 2000+ registered investors and 300+ financial advisors. You can sign up as a lender on the Monexo platform in just a few simple steps. Visit www.monexo.co to add Peer to Peer lending to your investment portfolio today!

What If A Borrower Defaults On Your P2P Loans?

Every investment brings with itself some amount of risk. Even investments as direct and seemingly safe – such as real estate and gold, can go through hard times. It’s only natural then, if you expect P2P lending to cause an upset too. But you’re likely to overestimate your risk here. Like any other investment, you’ll need to guard against risks – such as defaulting borrowers.

When you are a beginner in P2P lending, it is prudent to check the collection support/effort the lending platform will provide, in case of borrower defaults. At Monexo, we are both proactive and transparent on these matters.

Here is a guide which would help you secure your P2P investments and lessen your worry.

Securing Your P2P Investments

P2P lending platforms follow a general process when it comes to dealing with delayed payments, which involve collection, recovery and other safeguards. Let’s study Monexo’s process in detail and understand what measures it provides to secure it’s lender’s money.

The Collection process at Monexo

Here’s an overview of the process at Monexo when a borrower is late on repayments and is moved to the collection process.

1. First Stage: Between 1 to 15 days of delay, Monexo sends out emails, followed by calls to the borrower notifying about the delay in repayments. At least 2 attempts for automatic deduction (using NACH debits) are made during this period, post which late fee penalties start getting applied.

2. Second Stage: If the borrower continues to delay his repayments (between 31-60 days), Monexo then authorises a collection team to do physical visits and collect the payments. The lenders don’t need to bother themselves with these visits as this is managed from Monexo’s end. By this time, the delay in payments start getting reflected in borrower’s credit history thus bringing down his credit score and significantly impairing his ability to get new credit.

3. Third Stage: At this stage between 61-90 days, legal measures will be initiated – including the filing of a legal case for recovery of pending dues. The penalties over delay will continue to be applied.

4. Last Stage : If the borrower still hasn’t repaid, the loans written off as an NPA per the RBI’s directives. However, the collection and legal recovery efforts made by Monexo will still continue

Bringing transparency to the collection process

At Monexo, significant technological investments have been made to ensure that lenders are able to track their P2P investments with utmost ease. All lender transactions with Monexo are logged and recorded and for every lender there is instant access to this information any time, any place

  • Once a lender logins to the Monexo dashboard, she/he can view her/his entire portfolio, along with currently open loans, all repayments, delays and other updates.
  • For all delayed payments, Monexo transparently updates all its communication with borrowers – including email exchanges, call recordings (even those that don’t connect) and other collection updates it receives during the entire process.

What other measures does monexo have to protect your investments?

At Monexo, we are continuously striving to develop innovative solutions to protect the interests of lenders. As part of this effort, we have launched Credit Shield. With Credit Shield, if a borrower is unable to honor his repayments due to some unforeseen circumstances, Monexo still has you covered. Credit Shield is a group insurance policy designed to protect lenders in case the borrower is unable to make his repayments.

For a borrower, there can be some unforeseen scenarios –

  • Such as a loss of job,
  • Accidental death, or
  • Even disability,

These scenarios can put the borrower’s repayment schedule in trouble. There is where Monexo’s Credit Shield steps in – it diverts the proceeds of the insurance to cover up to 100% of the lenders’ outstanding principal.

What’s better?

  • No paperwork for lenders – The borrowers make the claim, which is then processed and the claim proceeds are applied directly to outstanding loan amount
  • Completely free – And did we mention this is completely free for the lenders? There’s no premium or payments that you need to make to get this coverage

We’ll discuss Credit Shield in a separate post of its own soon.

But apart from the protection provided by the platform, there are additional ways through which you can protect your investment such as

1. Diversification – At Monexo, lenders can lend as low as 1000 Rs to single loan contract and thus spread there investments over a larger number of borrowers.Diversification is like the holy grail of P2P Lending. If your investments are adequately spread across multiple borrowers, the impact of delayed payments can be greatly minimised and the security of your portfolio significantly enhanced.

2. Loan selection as per your risk appetite – At Monexo, loan contracts are risk graded on a scale from M1 to M8 . M1 denotes a very low risk and thus a lower return and M8 denotes a high risk and thus are priced higher with high return for lenders. This internal grading allows lenders an unbiased perspective on the quality of the borrowers. Lenders are well advised to lend only to loan contracts that match their risk taking ability.

P2P lending 101 – The Ultimate Beginner’s Guide

Starting your investment journey? Or looking for an addition to your portfolio that provides higher, better returns? Here’s a guide on P2P Lending – an avenue you’d certainly want to consider, What is p2p lending?

Peer-to-peer lending, also abbreviated as P2P lending, is the practice of lending money to individuals or businesses through online services. These services match lenders with borrowers in a decentralised manner. There is no involvement of traditional institutions like banks.

Let’s took a look at how P2P lending works from both borrower and lender perspective

The Borrower Perspective

Seeking loans from banks has typically been a stressful procedure. Selecting your bank from a plethora of options, filling out an application, waiting for documents (and your profile) to be verified, signing multiple papers and finally the long wait after which the loan amount arrives. That too on an interest rate which may deliver a heavy blow to your earnings.

But what if there was an easier, more customer-friendly way? Well, there is.

P2P lending helps borrowers with access to loans from multiple individual/Peer-to-peer lending. Think of it like a marketplace (like Ola or Uber) for loans, where there are multiple lenders available to fund your loans. The best part? It’s simple and 100% online.

  • You raise a loan request with the required amount, and the platform will verify your credentials & documents
  • Once your loan request is approved, it’ll be made live on the platform.
  • Lenders can now see your profile, assess you and lend you money.
  • Highly private and secure. No personal details (or documents) are broadcast to all lenders. Instead, lenders see only the information useful in making a judgement on their investments (like interest rate, repayment tenure, past payment history)
  • Funding is quicker as there are multiple lenders available to fund the loan
  • The loan amount gets credited directly to your bank account and your EMI payments can be made through auto debit of your bank account. The platform will take care of routing it to all the individual lenders

At the end of the day, it’s a marketplace where everyone gets to choose for themselves!

The Lender Perspective

For investors, it is an ideal opportunity to earn high and earn safe. P2P Lending has been gaining rapid adoption amongst lenders across the country, and the reasons aren’t surprising surprise if you think about it. It comes without the volatility of the stock market, and without the low returns of other avenues such as a fixed deposit. It’s also regulated, and offers a sufficient amount of security.

Here’s the lender perspective on P2P Lending:

  • The lender has the ability to choose the risk profile of the borrower he wants to lend money to, as the P2P platform provides all the required details like salary, debt service ratio, past repayment records.
  • Further, P2P platforms like Monexo have an internal risk grading mechanism, where the loan contracts are risk graded and priced accordingly for the lenders’ benefit.
  • The lender has the ability (and should) to diversify his P2P portfolio across multiple loan contracts as he can lend an amount as low as Rs 1000.
  • In a platform like Monexo, there is a clear demarcation of lender funds through an escrow account. This ensures that lender funds are only applied to the loan contracts chosen by them and not for any other purpose.
  • In case of delayed payments by the borrower, safeguards are provided by the P2P platform by ensuring prompt reporting to credit bureau thus impacting borrower credit score and his ability to avail future credit.
  • P2P platform also undertake collection efforts to get back delayed/skipped payment from borrowers including collection calls, physical visits to borrower residence and office, legal recovery actions.
  • Overall, for the lender investing in P2P is an attractive proposition. The average returns earned by the investors is in upwards of 15%.

The evolution of P2P lending in India

The indian retail financial system was dominated by only a few banks and NBFCs. In the absence of competition, these institutions had become complacent leading to outdated technology and absence of innovation. These institutions are wired to prioritise protecting their bottom lines over expanding in the market.

On the other hand, P2P Lending platform functions differently. Greater and innovative use of technology have enabled the platforms to use non traditional data (such as social media usage, location history, and more) to verify borrowers profile more accurately. This has led to easier and faster access to credit for genuine borrowers.

The origination of P2P lending in India can be traced back to 2012, which is when the country’s first P2P Lending portals began to emerge.

  • The growth that followed was rapid. Within just a few years, the country was brimming with over 30 such P2P intermediaries
  • The idea was received with great enthusiasm across the country, as a large section of India’s borrowers and lenders stood to benefit generously from the platforms.

The recent Non-Banking Financial Company – Peer to Peer Lending Platform (Reserve Bank) Directions, 2017 passed by the RBI has provided the industry with much needed regulation and direction.

Some of the salient features of the Master Directions are:

Registration process: Every existing and prospective NBFC-P2P shall make an application for registration to the Department of Non-Banking Regulation, Mumbai. Existing NBFC-P2Ps shall apply within three months from the issuance of these directions

Net owned fund—at least 2 crore: The RBI has regulated that all the registered NBFC-P2P must have a net owned fund of not less than 2 crores. This is necessary for the encouragement of the credibility of the industry. Also, it requires a good amount for the investment in technology, credit assessment and customer support once the platform is set up. this appears to be an appreciable to discourage fraudulent and non-serious players.

Leverage Ratio: RBI has asked these platforms to maintain a leverage ratio not exceeding 2. The leverage ratio is the representation of debt vs owned capital in any organisation. This would be helpful in bringing financial stability to the platform.

Escrow Account: It is necessary for all NBFCs to maintain two escrow accounts through which all the P2P transactions are processed—one for investments and the other for collection from borrowers. This would make the functioning smoother, faster and secured. Monexo deployed an escrow account for its customers far earlier than the regulations, and was already in compliance with this guideline.

Lending and Borrowing Amount: A lender can lend an aggregate amount not exceeding Rs. 10,00,000/- across all P2Ps platforms at any point. similarly; a borrower can borrow not exceeding Rs. 10,00,000/- across all P2P platforms. However, the exposure of a single borrower to the same lender across all P2P platforms shall not exceed Rs.50,000/-.

Submission of data to CICs At last, all P2P NBFCs have been instructed to submit their data to Credit Information Companies(credit bureaus). This would help bring more credibility to the system, and as credibility attracts investments, this would help the industry grow.

The Master Direction passed by the RBI are likely to help P2P lending achieve sustainability in India. A sustainable operational model is bound to help rank P2P lending among prospering investment classes.

Why is it important to create a passive income source, and why P2P lending is ideal

Passive income is income that you generate, as they say, on the side. The effort on the recipient’s part is minimal, and yet there’s a continuous flow of money. Broadly, there can be two kinds of passive income:

  • Income received from rental property;
  • Income generated from some kind of professional service, or investment

One way of generating passive income is – P2P lending. P2P Lending, or Peer to Peer lending, involves lending money without the involvement of any financial institution. There are portals like Monexo that help people take part in P2P lending by matching the borrowers with the lenders., It can prove to be ideal in many ways if you’re looking to generate passive income. Let’s dive deeper.

Why passive income?

Our economy today has evolved to an extent that there are plenty of sources to make money. People do prefer to choose safer options – such as saving in a bank. Some people even invest in the share market and mutual funds. Although in India, the number of investors is only about 1.5% of the total population (2015 – Bloomberg).

There are others of course, who invest their money in fixed deposits (FD). They’re not earning large returns either. So what are they missing out on?

Passive income can be generated through many ways

  • Writing books
  • Renting your property
  • Creating a product through which you keep getting royalty
  • Investing in dividend paying stocks, and even becoming a YouTuber!

But is it necessary to generate passive income? Wouldn’t you rather spend your non-working hours relaxing or getting some rest?

Why You Need Passive Income

  • Passive income means lots of free time! All the relaxing and rest you’d rather do? Passive income enables it! Passive income doesn’t require too much recurring work to be put in. If you’re not working to generate this extra money, you’re obviously freeing up time for yourself while earning a decent amount. You might even be involved in a tiring full day job and still be earning less than you can with right passive income sources. There are many people out there who work tirelessly day and night to make both ends meet, and are able to spend neither time nor money on things they or their families enjoy.
  • Passive income gives you stability and security. No job ever comes with a never ending 100% warranty card! The future is always uncertain and your business, your company, or whatever it is that you’re involved in might suddenly shut down or face huge debts. Passive income has a huge role to play here. It can act as your contingency plan in unfortunate events. Your passive income would come to your rescue, and you’ll always have the safety net to make ends meet.
  • Passive income helps make life stress free. At some point or the other, many don’t have a job that pays well, or sometimes they don’t even pay on time. If you are involved in such an atmosphere, more often than not, you’re tensed about your next paycheque. Needless to say, this can be frustrating. It can take a toll on your personal life and even health. If you’re generating passive income, budgets are easier to manage, and life isn’t a never ending countdown to the end of the month. You’ll always have money!
  • Passive income is your stepping stone to financial freedom and flexibility. With income levels sustaining you well, they open up the possibility of letting you pursue what you want, and plan for short term happiness without causing a dent in long term plans and stability!

Now that we’ve well established the significance of a passive income, let’s take you to the hottest way to generate it – P2P Lending.

Why P2P lending?

Peer to Peer lending, also called social lending at times, is another example of the multiple ‘shared economies’ we’re seeing spring up lately.

An Uber involves sharing cars to generate income.

An Airbnb or an Oyo involves sharing accommodation to generate income.

Similarly, P2P lending involves sharing your wealth to generate more income.

The concept originally began with the aim of connecting lenders to borrowers. It has now gained a wider recognition and become quite popular among small investors and businesses. P2P lending eliminates the financial intermediaries, so there’s minimal paperwork to be completed before getting a loan, which is quite often the bottleneck before loans are approved by banks.

In a P2P lending setup, we have a free market between lenders and verified borrowers. Lenders are free to lend money, at attractive interest rates, to multiple  borrowers. It’s the classic free market, with lenders competing to fund the best borrowers, and borrowers seeking to offer the highest returns to attract lenders.

Let’s find out the reason behind the popularity of P2P lending, and why is it important.

  • We know how difficult it gets for the Small and Medium Enterprises (SMEs) to get loans from banks. They have to sign a thousand papers, submit many documents for verification and even then, banks take a lot of time to verify the borrower’s profile. In P2P lending, the background verification process is way faster and easier. And once the profile is verified, there’s no waiting to receive the money. Consequently, there’s plenty of borrowers who’d rather take a loan this way.
  • A lot of lenders are jumping on the P2P bandwagon because it generates passive income for them. With the right amounts invested, your returns – coming in the form of EMIs by borrowers – can rival your monthly income.
  • The rates beat many other investments! At Monexo – lenders can make anywhere between 13% to as high as 30%!
  • Unlike many other sources of passive incomes, the returns from P2P lending are fixed, and you know how much you’re going to generate every month, and for how long. The lack of ambiguity is a big plus for many.
  • These fixed monthly returns also make P2P lending a unique form of investment. Other asset classes – such as mutual funds, equity markets and others – involve keeping your principal invested to generate returns. If you’re lending via P2P models, you’re getting your principal back every month as well!

There you have it. P2P Lending is solving multiple problems at once – it’s a solid amount of passive income, with no ambiguity, high returns, and you’re helping businesses borrow and grow in the process. It’s the ideal win-win scenario!

RBI regulates P2P lending – paving the way for a new era in consumer finance

RBI has released the regulatory framework for Peer to Peer lending in India – ushering them in as a new class of NBFCs.

At Monexo, we welcome RBI’s decision to regulate Peer to Peer lending platforms as a new class of Non Banking Financial companies (“NBFC – P2P”).

The Master Directions for P2P platforms released on the 4th of October reiterate the regulator’s belief in the potential P2P lending has as an alternative credit channel and its ability to deepen financial inclusion while providing investors the opportunity to access lending as an asset class for better returns and portfolio diversification.

Monexo was the first P2P lending platform in India to implement the Escrow account framework for transfer of funds between lenders and borrowers and to also initiate credit bureau reporting of loans disbursed through the platform. We are happy to note that the RBI has clearly recognised and recommended the use of both these practices as part of the final regulatory framework.

Here are a few key takeaways from RBI’s final guidelines for P2P lending :

Eligibility criteria :

● P2P platform must be incorporated in India and should have net owned funds of atleast INR 2 crores
● The management and directors of the P2P platform need to fulfill the ‘Fit and Proper’ criteria as laid out by RBI

Scope of permitted activities :

What activities can be performed by the platform :
● Platform can undertake activities pertaining to borrower due-diligence, credit assessment and risk profiling
● Platform can independently determine loan pricing and fix interest rates for borrowers based on the Annualised Percent Rate (“APR”) format
● In addition, P2P platform can also help in facilitating loan disbursal, repayment collection and pursuing collection efforts to recover outstanding dues
● P2P platform can become members of credit bureaus and report loan performance

And what is not allowed :

● P2P platform cannot hold any lender or borrower funds on it’s balance sheet – this prevents platforms from direct lending, co-lending or deposit raising from lenders
● P2P platform to not provide any credit enhancements or credit guarantee
● P2P platform to deal only with unsecured lending – no secured loan products can be offered through the platform

Lender and borrower exposure :

● A lender’s exposure in P2P lending across all P2P platforms to be subject to a maximum cap of INR 10 lakhs with individual exposure on a specific borrower not exceeding INR 50,000
● Aggregate loans availed by a borrower across all P2P platforms to not exceed INR 50,000
● Maximum tenor of loans availed on the platform to not exceed 36 months

Disclosure and reporting requirements :

● P2P platform to disclose lender details pertaining to the loan (expected returns, fees etc.)
● P2P platform to disclose on it’s website details of the credit scoring process along with monthly portfolio performance and measures taken to protect customer data
● Platform to ensure that every loan disbursed through the platform is backed by valid loan agreements between lenders, borrowers and the NBFC P2P.
● P2P platforms to have a Board approved Business Continuity Plan
● Establish a Fair Practices code which ensures that lenders are informed and acknowledge the risk involved in P2P lending

With the regulatory framework in place and RBI giving existing platforms 3 months to comply with the guidelines, P2P lending is on it’s way to becoming a mainstream and a more effective way to lend and borrow

The success of the model globally throws interesting insights into how P2P lending can evolve to service the credit requirements of aspirational, digitally savvy borrowers who expect a more inclusive, instant framework of access to credit. With a significant drop in fixed deposit rates and other asset classes like real estate performing poorly, P2P lending is also poised to fill in a significant vacuum in the investor’s portfolio as an attractive alternative debt investment for high yield and regular income.

To read the full version of RBI’s guidelines on Peer to Peer lending platforms, please click here