Think of a situation where you have an urgent requirement of money. You either ask for it from your friends and relatives, or visit a bank to apply for a loan. In the first case, there are high chances of rejection, and the second case requires a good deal of paperwork and verification checks and might take days or, in worst cases, up to a month. Now imagine a situation where someone has some extra cash which they wants to invest for higher returns but is unable to find an avenue for the same. A Peer to Peer Lending or P2P Lending platform is an NBFC, which acts as a bridge between the lender and the borrower by providing both with a place to meet and sign the deal.
The interest a borrower pays to the lender during repayment is sometimes slightly higher than the prevailing interest rate in the market. The question however remains - are P2P platforms safe enough for a lender to part with his/her hard-earned money? This blog simplifies P2P lending and gives you an independent review of the safety parameters of P2P lending as a smart investment option.
Stringent Borrower Selection and Approval Process
It is a general perception that only those borrowers apply for a loan from P2P platforms who are otherwise ineligible for getting it from a bank or NBFC. This is nothing less than a wrong generalization. Borrowers come to P2P because of multiple reasons.
A borrower may visit a P2P platform because his/her income is lesser than what is stipulated by banks/ NBFCs or the borrower hasn't obtained a credit score yet or simply doesn't have one. Anyone may get a credit score by visiting CIBIL. The next reason why borrowers prefer P2P platforms is because of its flexibility.
A borrower may easily take a loan of Rs. 50,000 from a P2P lender and repay it before the end of the loan repayment term, without any penalty. Lastly, P2P platforms offer small loan amounts as well, which is rather impossible to get from banks.
Let us now understand how Peer to Peer Lending platforms ensure that borrowers are genuine and not willful defaulters.
On registration, a borrower is required to fill in a KYC form and submit documents like photograph, PAN Card, address proof, and certificate of highest degree. Salaried professionals need to furnish details of salary in the form of bank statement, salary slips and proof of employment.
For self-employed or business professionals, submitting 6-months' bank statement, a copy of last 2 years' IT documents, and a copy of business establishment registration and GST certificate, is mandatory.
Once a borrower completes the first step, a P2P Lending platform like i2iFunding's verification team visits the borrower's home and office for physical verification. i2iFunding's Documentation Supervisor collects all personal, professional, and financial information from the borrower and the in-house verification team verifies it with government databank, credit bureaus, and other relevant sources.
All of these well-documented steps ensure transparency and peace of mind for both the lender and borrower.
Credit Risk Assessment
Every P2P platform has its own credit evaluation team which analyses the credit history of borrowers. i2iFunding, for example, uses its proprietary Score Model for a 360-degree assessment.
The Score Model factors in more than 100 parameters which include the credit history, financial exposure, and behavioral patterns of the borrower. After evaluating the credit risk associated with a borrower, a risk category is assigned on a scale of A to F, where A is the strongest credit rating and F is the lowest.
The robust credit risk assessment mechanism allows lenders to choose the borrower by knowing the risks well in advance. Surprisingly, only 5% of the total loan applications gets listed on i2i's funding page, and the rest 95% are rejected.
Chances of Default/Delay in Repayment
Other than a few sovereign investment options, almost every other investment is fraught with risks. A credible institution is one which takes steps to reduce the risk associated with an investment. P2P platforms' Collections and Recovery wing take multiple (including legal) steps to ensure there are no defaults or delays. i2i Funding, for example, has a near zero ratio when it comes to delays or defaults. As the first step, i2i regularly updates borrowers about the repayment dates and other details.
If a borrower fails to make a payment within 90 consecutive days, i2i Funding sends a legal notice to the borrower. This is in addition to other steps which include declaring the borrower as a defaulter, reporting to CIBIL, imposing penalty, and sending the recovery team to the borrower's home and office. For learning more about the collection and recovery mechanism adopted by i2i Funding.
In this age when costs are increasing and interest rates are declining, a smart investment option like peer to peer lending can help an investor to beat market returns and get higher Return on Investment. Before registering on a P2P platform as an investor, check whether it is an RBI registered NBFC or not. Also make an effort to check its past track record and total funds handled. P2P platforms give you a safe and secure opportunity to earn extra on your investments while helping someone in need.