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The increased presence of non-banking financial companies (NBFCs) in India has sparked a lending revolution, enabling individuals to fulfill their financial needs using NBFC products, bypassing traditional banks.
Most of these investment opportunities operate on a comprehensive digital platform. These platforms serve as havens for investors, offering them the chance to explore new avenues for generating profits and diversifying their portfolios while enjoying a passive income. One such modern offering is Peer-to-Peer lending, which has recently gained significant popularity in India.
This platform allows individuals to participate in retail or SME lending through short-term loans lasting no longer than a year. As these loans are not tied to the public markets, they provide insulation, allowing investors to sidestep unpredictable market fluctuations while still earning returns that outperform the market.
Market Size of Peer-to-Peer P2P Lending in India
Source: Technavio
According to a report by TechSci Research, The Peer-to-Peer (P2P) Lending Market in India is expected to grow significantly, with a Compound Annual Growth Rate (CAGR) of 21.66% from 2023 to 2029, reaching a market size of USD 9.60 billion in 2023.
Peer-to-Peer Lending for Investors and Alternatives growth is driven by factors such as financial inclusion, technological advancements, a supportive regulatory framework, and the appeal of diversified investment opportunities.
However, challenges such as regulatory uncertainties, credit risk and default management, intense market competition, and cybersecurity and data privacy concerns need to be addressed to sustain the growth and stability of the P2P lending ecosystem in India.
Peer-to-peer lending as an Alternative Investment
Peer-to-peer (P2P) lending is a form of alternative investment where individuals or businesses (borrowers) can loan funds directly from other individuals (lenders) through an online platform.
This type of lending has gained popularity due to the inflation-beating returns it offers, which are typically higher than traditional investment routes.
Alternatives to P2P lending include mini-bonds and equity crowdfunding, where investors invest in unlisted companies and receive shares in those companies.
Working Of P2P Lending
P2P lending platforms facilitate the connection between borrowers and lenders, often charging platform fees for this service. Similar to traditional loans, borrowers pay interest while investors who provide the funds earn interest.
Each platform has its own set of standards for evaluating the creditworthiness of applicants. The interest rates for borrowers are determined based on their credit assessment. Investors have the flexibility to choose where to allocate their funds based on the risk profile and the desired returns. The Reserve Bank of India (RBI) oversees and regulates these platforms to prevent fraudulent activities.
In India, P2P platforms utilize various data points, including financial, personal, and social data, to assess borrower risk. This risk evaluation is shared with investors, enabling them to decide whether to lend to a particular borrower. Through the platform, investors can diversify their investments and lend to multiple borrowers, while the P2P platform handles all aspects of the loan processing.
P2P lending is recognized as a high-risk, high-reward investment instrument, as it involves lending money to businesses or individuals with limited credit scores or collateral. Investors can manage this risk by selecting a platform with rigorous screening criteria.
Role Of Online Platforms In Facilitating P2P Lending
Digital P2P lending has 97% of the market share in the P2P lending market.
Online platforms significantly facilitate Peer-to-Peer (P2P) lending, which connects borrowers and lenders directly, bypassing traditional loan institutions like banks. These platforms have gained popularity due to their efficiency, accessibility, and competitive interest rates. P2P lending platforms analyze creditworthiness, establish interest rates, and manage the loan process using technology, data analytics, and algorithms.
The emergence of P2P lending platforms has created new opportunities for borrowers who may have had difficulty acquiring loans from traditional banks, particularly those with poor credit. This increased loan availability benefits underprivileged or underrepresented communities, boosting financial inclusion.
P2P lending platforms also disintermediate the loan process, lowering costs associated with traditional lending, such as overhead charges, physical branches, and bureaucracy. This disintermediation allows P2P lending platforms to provide more appealing interest rates to borrowers while still giving competitive returns to lenders.
Benefits Of Peer-to-Peer Lending
P2P lending presents an appealing opportunity for diversification and offers a range of benefits:
- Ease and Convenience: P2P lending platforms streamline the entire loan process, from paperwork to disbursal and recovery, enabling inexperienced investors to manage their investments passively.
- Diversification: P2P lending allows young investors to expand their investment portfolio and diversify beyond conventional options such as stocks and bonds. Consider P2P lending a fresh avenue that allows you to delve into, invest in, and generate wealth.
- Attractive Returns: Depending on the specific P2P platform, investors can potentially achieve average returns of around 12%, contingent on the borrower’s risk profile.
- Accessibility and Flexibility: Well-suited for retail investors, P2P platforms allow individuals to invest smaller capital amounts.
- Extensive Diversification: Investors have the flexibility to select from various loan types, including short-term or long-term loans and personal or business loans, that align with their investment objectives and risk tolerance.
- Non-Market Linked Returns: P2P lending remains insulated from market fluctuations, thereby providing investors with a means to safeguard their capital.
How are P2P Lending returns taxed?
The payments received by the lender consist of both the principal and interest components. As per section 56(2) of the Income Tax Act, 1961, only the interest portion is subject to taxation. This income is classified under the category “Income from other sources.”
Consequently, you will be required to pay tax on the interest earned at your applicable tax slab rate.
Disadvantages of P2P Lending
While P2P lending offers numerous advantages, it also comes with certain drawbacks to consider:
- Default Risk: There is a possibility that borrowers might default on their loans, resulting in potential losses for lenders.
- Lack of Regulation: P2P lending is subject to less stringent regulation compared to traditional lending methods, potentially leaving it more susceptible to fraud or unethical practices.
- Restricted Borrowing Capacity: P2P lending platforms may impose limitations on the amount of money borrowers can access, which may not fulfill the requirements of certain borrowers.
- Limited Liquidity: P2P lending investments lack the same level of liquidity as traditional investments, meaning lenders may have to wait until the end of the loan term before they can access their funds.
How Does Assetmonk Compare To Other P2P Lending Platforms
Assetmonk stands out among other P2P lending platforms due to its unique focus on real estate investment, offering clients high-quality investment opportunities with reduced risks and attractive interest rates.
As a real estate fintech platform, Assetmonk utilizes tokenization and the financial utilisation of P2P lending to connect developers with investors. This innovative approach combines equity crowdfunding with P2P lending, enabling investors to build a diversified portfolio of assets and engage in low-risk investments.
The platform provides a user-friendly experience, a wide range of investment opportunities, and an internal resale market, making it convenient and appealing for both borrowers and investors. By establishing a direct connection between them, Assetmonk bypasses traditional loan institutions.
The platform’s key features include thorough verification processes for borrowers and investors, secure transactions, and effective risk management. These elements are essential in creating a successful P2P lending platform.
Assetmonk also offers investors guidance regarding portfolio diversification. By facilitating investment in multiple high-end projects, the platform helps mitigate risks, in contrast to the traditional asset class, where investors often find themselves owning only one or two rental properties.
The Future of P2P Lending
The P2P lending industry is experiencing rapid growth as more and more individuals embrace alternative lending approaches. According to a report from Allied Market Research, the global P2P lending market is projected to reach $558.91 billion by 2027, exhibiting a notable compound annual growth rate (CAGR) of 29.7% from 2020 to 2027.
As this industry expands, it is anticipated that there will be a rise in regulations and oversight aimed at safeguarding the interests of both borrowers and lenders. P2P lending platforms may also diversify their offerings by incorporating other financial products, such as insurance and investment opportunities.
Bottom Line
P2P lending is an innovative method of borrowing and lending funds, providing numerous advantages compared to traditional lending approaches. Although it is important to acknowledge the existence of certain drawbacks, the P2P lending industry is experiencing significant growth and is projected to continue expanding in the foreseeable future.
If you are contemplating borrowing or investing through a P2P lending platform, conducting thorough research and comprehending the associated risks and benefits is crucial. With a careful approach, P2P lending can be an excellent means to obtain cost-effective credit or diversify your investment portfolio.
Assetmonk recognizes that our investors have a variety of investment options in addition to real estate. Only outperforming real estate assets will make it onto our list after our professional asset management team compares them to other similar financial instruments, ensuring that investors receive higher returns as well as consistent monthly income. Only assets that meet our high-potential, secure-asset criteria will be accepted onto our unique platform.
Our primary expertise lies in offering individualized guidance and carefully curated fixed-income investment opportunities supported by real estate assets. We remain dedicated to our passion for guiding investors through this transformative journey and helping new and veteran investors realize the full potential of alternative investment in commercial real estate.
FAQs
Q1. What is the interest rate of P2P lending?
A. The customary interest rates for P2P lending generally fall within the range of 9-12%.
Q2. How much money do I need to invest in P2P lending?
A. The barrier to entry in P2P lending is fairly flexible, allowing you to invest as much or as little as you desire in most cases.
Q3. Where can I go to invest in P2P lending?
A. Participating in P2P lending is conducted entirely through digital platforms. You simply need access to a website or app that facilitates such investment opportunities.
