A Comprehensive Guide to Indian P2P Investing: Expected Returns, Risks, Checklist

In the dynamic landscape of finance, traditional banking models are being reshaped by innovative alternatives. One such transformative force is Peer-to-Peer (P2P) lending, a model that helps you get returns by investing your money in the top creditworthy borrowers in India. This article explores the roots and evolution of P2P lending, its landscape in India, and what the future holds for this investment avenue.

A Global Evolution: A 15-Year Journey From Zopa in the UK to Platforms like Per Annum in India

P2P lending traces its origins to the UK in 2005 with the inception of Zopa, followed by the emergence of Funding Circle in 2010. This new-age model swiftly crossed borders, landing in the US in 2006 through platforms like Prosper Marketplace & LendingClub.

In 2016, P2P lending platforms surfaced in India-however, challenges, including limited awareness and investor reservations, hindered market growth. The Reserve Bank of India implemented regulations in 2017, creating a structured framework for regulation, governance, & risk mitigation.

RBI offered NBFC-P2P licenses to eligible P2P companies. In 2024, there are currently 26 P2P companies in India. The combined AUM of the industry together now stands at more than $1 Billion.

How does P2P Lending Work?

A peer-to-peer (P2P) lending platform acts as an intermediary between two parties, overseeing key aspects of the lending process, including credit assessment, onboarding, loan distribution, collection, and recovery. Through such a platform, an investor can generate stable returns on their surplus funds or savings. Simultaneously, a borrower can access the credit they deserve to fuel business growth.

Here's why Investors choose P2P as a New Asset Class

Diversification, and Stability Around Beating Inflation

In the current scenario, everyone understands the importance of beating inflation but needs clarification about choosing a combination of asset classes given the expertise required to overcome the volatility risks. But P2P investing helps to surpass such concerns as it offers stability around your returns. The historical returns generally range from 11-12% which is enough for one to beat inflation every single year.

Simplified Financial Planning

Stable returns provide you with the flexibility of planning & chasing your financial goals much more efficiently. Yearly 11-12% CAGR stable returns help you double your capital every six years. Now even mutual funds can give you such returns but if you are planning for a specific investment goal such as accumulating a down payment on your new house P2P can be a better option because you are aware of how much money you would tentatively have post the maturity of your investment.

Performance-Linked Fees

In P2P, you get a promised return, but if the company can't deliver the promised returns, they don't charge their fee. However, not all P2P companies follow the same philosophy. Per Annum has been at the forefront of implementing such a model.

What kind of Returns & Plans can you expect from P2P?

Fixed-Term Investment Plan

Most P2P companies offer a variety of fixed-term plans, spanning durations from 1 month to 5 years lock-up period. Investors can expect stable returns, ranging from 11% p.a. to net annual returns (compounding) of up to 14-15% p.a. This diverse range provides flexibility for investors to choose the duration that aligns with their financial goals, offering a reliable avenue for wealth creation.

Risk Mitigations in P2P Lending

Eliminating Risks Via Tech & Data Penetration - Bringing Down the Per Borrower Risk to as low as Rs. 1000

During the early days of P2P lending the maximum exposure you had per borrower was almost Rs. 50,000. So, if you are investing Rs. 5 Lakh your money is being diversified amongst 10-12 different borrowers. But is it enough?

With advanced data & tech-enabled lending algorithms Per Annum's P2P partner Lendbox has brought this down to almost as low as Rs. 100-1000. Instead of investing a substantial amount, say Rs. 50,000, in a single borrower, the funds are distributed among a highly diversified group of thousands of borrowers.

Suppose if one borrower encounters financial challenges and cannot repay. In that case, the investor's exposure to risk is limited to a smaller fraction of the total investment, often as low as Rs. 100-1000. By diversifying investments throughout the year, the investor can better withstand individual defaults.

Regulation Checks & Audits with RBI

The RBI conducts checks and audits in P2P lending and investment platforms regularly to ensure regulatory compliance. The periodicity of the internal audit of the branches should be at least once every 12 months, which should be of surprise character.

Although it is not mandatory, RBI can do several audit checks in a year or if there's any compliance.

How to choose a P2P company in India?

In India, with P2P lending being a new concept with limited options, choose a platform with a strong track record, RBI registration, and positive user reviews.

Here's a checklist you should follow:

1. Evaluate borrower risk category, demographics and nature of lending product (for example - consumer/merchant)
2. Evaluate platform size (AUM), portfolio performance, total lenders and borrowers, and active users.
3. Thoroughly read the RBI Master Directions for P2P-NBFC and ensure that the platform is compliant.
4. Assess risk mitigation strategies.
5. Confirm if the platform offers collection and legal services in case of default.
6. The NPA/write-off percentage should not be too high. Always compare with NPA numbers disclosed by competing platforms and fintech lenders.

By following this checklist and prioritizing your risk tolerance and investment goals, you can make an informed decision when choosing a P2P lending platform in India.

Future of P2P as an Asset Class in India

The Indian P2P market is roughly estimated at Rs. 10000 crores as of now, so there's a long way to go for India. Now, platforms like Per Annum are on the rise too and have already shown profitability with a current AUM of 3000 crores. It's likely to become even more successful as an asset class in India.