Is My Money Secure in a P2P Lending Platform?

Introduction

Over the past seven months, I have travelled extensively, visiting around 25 cities, meeting over 500 Mutual Fund Distributors and more than 1000 Investors. Irrespective of their diverse cultures and perspectives, a common query regarding P2P lending consistently arises: “Is my money safe when investing or lending through a P2P platform?” This concern is quite understandable, given the instances of investors experiencing losses and mutual fund distributors facing similar issues.

Let’s delve into the risk mitigation parameters that ensure the safety of investors who choose to engage in P2P lending platforms:

• RBI Regulation: When considering any financial instrument, the first step for investors is to ascertain whether the industry is regulated by a governing body. In 2018, the Reserve Bank of India (RBI) introduced stringent guidelines for the P2P lending industry. To conduct P2P lending business, companies must obtain a license known as “P2P-NBFC.” Operating within the RBI framework enables P2P lending platforms to mitigate various associated risks, providing investors with significant comfort.

• Escrow Account Mechanism: To safeguard investors’ funds, the RBI mandates that neither P2P lending platforms  nor their promoters or employees can access the money invested or lent by individuals. This crucial rule is enforced through the Escrow Account Mechanism, which manages the flow of funds between investors and borrowers. An impartial third-party trustee company, typically a bank trustee, oversees this account. It is important to note that the trustee company must regularly submit reports to the RBI, in addition to the P2P lending platform’s submission of various data and documents.

• Credit Policy for Borrowers: P2P lending platforms are obligated to establish comprehensive credit policies and product lines that effectively mitigate risk parameters. This ensures that non-performing assets (NPAs) are kept under control and investors can earn satisfactory returns. For example, LenDenClub, one of the largest P2P Lending Platform,  meticulously evaluates  over 600 credit parameters before approving borrowers’ eligibility for loans. Furthermore, smaller loan sizes and shorter tenures tend to have lower default rates, as retail borrowers generally prioritize maintaining a positive image within their social circles, especially for smaller loan amounts.

• Credit Bureau Score: In India, multiple credit bureaus collate data from banks, NBFCs, and other financial institutions to generate credit scores for borrowers. These credit scores reflect borrowers’ credit histories and significantly influence the approval or rejection of future loan applications. As a result of this system, borrowers think twice before defaulting. All P2P lending platforms are mandated to provide monthly data to credit bureaus, which greatly impacts borrowers’ credit scores.
  
• Collection Mechanism: P2P lending platforms employ in-house collection teams that diligently pursue both physical and digital channels to recover dues from borrowers. Digital nudging plays a critical role, as borrowers often overlook or miss payment deadlines. Soft and hard collection calls are made, and when necessary, private agencies are engaged to facilitate recovery.

Let’s now address some prevailing myths surrounding P2P lending:

• Myth: P2P lending, like many alternative investments, is unregulated.
• Fact: P2P lending is regulated by the Reserve Bank of India.
• Myth: P2P lending borrowers are unable to secure loans from other sources.
• Fact: Borrowers prefer the convenience and expediency offered by P2P lending platforms.
• Myth: P2P lending is an extremely risky asset class to invest in.
• Fact: Borrowers undergo rigorous evaluation through a risk assessment engine and adhere to robust credit policies.
• Myth: Investing in P2P lending is only for HNI’s and needs a lot of money to invest in.
• Fact: Even a retail investor can start with 10,000 rupees investment which goes to maximum 50 lac as per RBI guidelines

Disclaimer: This blog only guides on a concept level, as investing involves risks, it is suggested that professional advice before investing would be solicited.