Lending it Right: 5 Things to Keep in Mind while Investing in P2P Lending
The first step is often the most critical. Before registering as a lender check if the platform has an NBFC- P2P Certification from the RBI
The rise of online P2P lending in India has empowered those who were otherwise left underserved or entirely unserved by the formal banking and financial services sector. It has also brought about a major transformation in the investment space by unlocking a tech-led and highly lucrative alternative asset class. The exponential growth that online P2P lending has registered since its inception – particularly since the RBI laid down the guidelines regulating the sector – has been testament to the changing investment preferences of the Indian consumer. If you’re looking to make the most of this growing opportunity by lending your money, here are some things that you need to keep in mind:
1. Choose the right lending platform
When making any big decision, the first step is often the most critical. The first thing to do, before registering as a lender, is to check if the platform has an NBFC- P2P Certification from the RBI. It is also prudent to compare the average lender performance on individual platforms. Lenders on most established P2P lending platforms are able to earn annual returns to the tune of 10%, while those on leading platforms such as Faircent.com have the opportunity to benefit from average net annualised returns in the range of 18% to 22%.
Moreover, it is important to evaluate the kind of support that P2P platforms extend to lenders, and how seamless the lending process is. Faircent.com, for instance, has its own mobile app to enable investing-on-the-go, which makes the process of online lending simpler and more convenient. It also provides lenders with collection and recovery support in case of a loan default. This includes an in-house collections team to follow-up with defaulting borrowers, as well as third-party tie-ups with legally-compliant collection agencies.
2. Build a diverse portfolio
Diversity is the key to good portfolio performance, be it for traditional investment options or for new-age alternative investment avenues like P2P lending. It is, therefore, advisable to invest in loan requests from borrowers across multiple regions, employment categories, income levels, and credit scores etc. to substantially diversify the potential investment pool. Top P2P lending platforms such as Faircent.com also assess and categorise registered borrowers across multiple risk-buckets to enable you to build a more diverse and robust investment portfolio.
3. Balancing risks with gains
No risk, no gain – this old adage holds true for investors, but only up to a limit. Investing in high-risk borrowers might get you better returns, but it comes with a higher risk of loan defaults. On the other hand, investing only in low-risk loans might not earn the kind of returns that you expect. It is crucial to balance the risks with returns for the optimum portfolio performance, which is why you must look at the default rates in various risk categories and discount your target expected returns by that amount. For instance, Faircent.com publishes NAR (Net Annualised Returns), which are basically the net risk-adjusted returns, to make it easy for lenders to understand the kind of returns that they can generate, and to help them balance it with the risk.
4. Empower yourself with information
P2P lending, just like any other investment avenue, delivers best results when you have a seamless flow of information to supplement your decision-making process. Apart from the borrowers’ creditworthiness, the P2P lending platform that you invest through should be able to provide you with additional information and tools for making accurate lending decisions as swiftly as possible.
As a leading P2P platform, Faircent.com analyses individual borrower profiles to provide detailed borrower information to lenders, as well as in-depth data around loan performances and trends, through its easy-to-use dashboard. It has also enabled an innovative auto-invest feature, which matches the lender’s predefined preferences with the borrower requirements and automatically sends a proposal when a new loan request meeting the criteria is posted.
5. Reinvest the interest income
One of the best ways of earning higher returns is reinvesting the EMI coming back to you into other loans. Not only does this help in maximising the returns that you can generate from your surplus capital, but also diversifies your lending portfolio for stronger and more robust performance. As per the Faircent.com Research and Analytics Report for Q1 2017, lenders with a reinvestment ratio of more than 100% generally reaped the benefits of compounding interest and portfolio diversification to register an increase in net annualised.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house
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