Peer-to-peer lending: Everything you need to know about it as an investor

Earlier this month, Reserve Bank of India (RBI) had said that it is set to bring peer-to-peer (P2P) lenders under its ambit. 

Later, on September 18, through a gazette notification, RBI said that P2P lenders companies will be treated as Non-banking Financial Company (NBFC). 

"For the purpose of this notification, the term “the business of a peer to peer lending platform” shall mean the business of providing under a contract, the service of loan facilitation, via online medium or otherwise, to the participants who have entered into an arrangement with that platform to lend on it or to avail of loan facilitation services provided by it," the RBI notification read. 

But, what is P2P lending?

P2P lending is basically a crowd-funding platform (mostly online), catering to both investors and borrowers alike. 

You get a chance to invest your money in P2P platform and let loan seekers borrow it for higher interest rates. If you have saved a considerable amount, you can earn from that money by lending it out; a kind of reward for your penny-wise frugality. 

Explaining the term, Aditya Kumar, Founder & CEO Qbera.com, said, "Borrowers (individuals or MSME/SMEs) too gain from this as they can get hold of instant funds in emergencies, which they probably wouldn’t have been able to get from traditional banks, that too without much hassle."

Debtors are either individuals or small companies. However, unlike a conventional savings account, there are chances of investors losing out on money if the borrower fails to repay. Thanks to the seamless and tech-enabled process, borrowers find it easier to get hold of funds at the earliest (in less than a day in most cases).

Should you invest?

Yes, P2P lending can be considered as an investment option. "If you choose to invest your idle savings in P2P, you can make huge returns and margins, especially when compared to mutual funds," Kumar said.

But as they say "Higher the risk, higher the return". Some of the P2P platforms in the country currently claim gross returns of 18-26% per annum. However the Indian P2P landscape is still at a nascent stage and economists expect a growth of $50 million USD by 2022, Kumar said.

There is no lock-in period for the invested amount and the investor can start reaping the benefits from the very next month; the EMIs repaid by the borrower(s) will be credited directly into the lender’s account. 

The returns can be reinvested in other financial product or in P2P itself to compound the profits over time.