Credit Risk Mitigation
Credit risk is the chance that you will lose money by lending your money to someone else. Whenever you lend your money to a borrower you are taking on a risk. Like other investment opportunities, lending also has its own set of benefits and risks.
The credit risk mitigation strategy you choose will depend on your business model and personal financial situation. But, there are several ways you can mitigate credit risks when it comes to loans or other forms of debt financing.
Credit risk is calculated on a borrower’s overall capacity to pay a loan. You should know about the five Cs of credit risk:
The strategies that help in mitigating the credit risk
There are several ways that businesses can mitigate the risks associated with potential loans and other types of financing arrangements.
With Peer-to-Peer lending investors have multiple ways to mitigate credit risks. Investors can lend money to individuals and businesses, as well as diversify their portfolios through peer-to-peer platforms. With high returns on investments and low risk, this is an excellent option for those who want a better return on their money than they would get from other investments.
Platforms like LenDenClub offer great ways to mitigate your credit risks. So let’s discuss how you should reduce your overall risk when it comes to your P2P lending portfolio.
A borrower’s creditworthiness depends on several factors. One such factor is the credit score.
Credit scoring is a measure of creditworthiness, which is used to determine if you are eligible for a loan or other financial product. The most widely used credit score in India is from TransUnion CIBIL credit bureau. This score ranges from 300 to 900, with higher scores indicating that the borrowers are more likely to repay their loans. So, such borrowers have greater access to lenders and more favorable terms on loans.
Credit scoring models take into account many factors—including your payment history and how much debt you owe relative to your income — to determine how likely it is that you will pay back what’s owed.
These factors can also affect how much interest rates might be charged when taking out a mortgage or car loan. Some lenders may offer lower rates if they believe borrowers’ scores indicate lower risk than others.
LenDenClub lends only to the creditworthy borrowers on its platform. It also uses an AI-based interface to access multiple parameters on borrower profiling. This process takes into account over 200 different data points based on which the platform allocates your funds to eligible borrowers.
Diversification is the practice of spreading your investments across different asset classes and funds. This helps to minimize risk exposure and provide a more return.
As an example, if you have 1 lakh invested that spreads across stocks, bonds, real estate and gold—that’s called a diversified portfolio. If you only invest in one type of asset class (such as stocks), then that’s considered being “un-diversified.”
In the case of P2P lending, diversification looks like spreading the fund across a mix of borrowers. On one hand. implementing such a strategy minimizes your risk of default, while boosting returns on the other.
That’s exactly what LenDenClub does with your investment. Its AI-powered credit risk evaluation helps you minimize your risk of loss. Although, the entire process is sophisticated with AI and ML technologies working behind the scenes.
As previously discussed, diversification is the practice of spreading your investment across various borrowers when it comes to P2P lending. By doing this you are able to mitigate credit risks up to a extent. But what if you can further lower this risk?
LenDenClub helps you do exactly this! Their platform has the capabilities to distribute the funds through a hyper-diversification model. As a result, a single borrower can be allocated an amount of as low as Rs 1 per lender. Diversifying your lending to such an extent can ensure that the impact of defaults on your portfolio is marginal and such barriers don’t stop you from earning higher returns!
Fintech is growing in India and is witnessing large-scale adoption. Consumers, investors, creditors, and institutions all alike are in favor of it. However, to date, a large sector of the Indian population is not served by traditional financial institutions like banks. Fintech is helping change that.
LenDenClub uses artificial intelligence (AI) & machine learning (ML) techniques as a form of data analytics tools. Implementing such advanced infrastructure can help such fintechs analyze large data sets with close to zero human intervention.
NPA means Non-Performing Assets. Nobody likes them; banks don’t like them, and neither does any lender. When investing in P2P lending the aim of any lender is to minimize such NPAs.
NPAs are loans for which the principal remains unpaid for more than 90 days. Basically, it’s money that’s overdue and is causing loss to the lender.
LenDenClub is a platform that marginalizes NPAs by implementing systematic risk-mitigation techniques that are discussed above. They also have a dedicated customer care number to help you in all situations. So if you’re looking at safe lending processes, your search ends here!
While automated processes are an effective way of managing large-scale transactions and detecting any fraudulent activities, there can be limitations to it. To mitigate what is known as a small margin of error, our team of experts stay on top of the lending processes. Our management team has a varied experience in the banking and lending industry. This as an effective way helps LenDenClub to set up its processes towards achieving the common goal of – creating a marketplace that offers easy access to a safe lending environment.
Why should you go for LenDenClub?
LenDenClub is a growing platform for lenders and borrowers, registered under the RBI. It uses AI to allocate your money to creditworthy borrowers. Borrowers are verified by the credit bureau after considering a lot of factors like credit score and debt to income ratio.
Moreover, it uses a hyper-diversified model to minimize risk for money lenders. With over ₹5000 crore+ of loans processed from our platform, LenDenClub is one of the largest players in the P2P lending industry.
Our Fixed Maturity Peer to Peer investment plan or FMPP delivers up to up to 10 to 12% per annum*. It has an AI-enabled matching system, which leaves very less room for defaults and mitigates risks.
The platform manages risk by using all the above mentioned techniques. From reviewing credit history to considering a borrower’s credit score, capital, and debt-to-income ratio, it’s a platform you should invest in.
Manage Your Risks Well
While there are many ways to mitigate credit risks, it’s important to know that the best way to do this is by managing your money well so that you can manage your credit risk. This means diversifying your investments and lending only to borrowers with high creditworthiness.
Look for investment options that have low risk. A general issue investors see is that whenever the return is high the risk also goes up. A good investment with high returns is peer-to-peer lending. So, start with LenDenClub and earn a safe interest on your money.
*P2P investment is subject to risks. And investment decisions taken by a lender on the basis of this information are at the discretion of the lender, and LenDenClub does not guarantee that the loan amount will be recovered from the borrower.