P2P Lending as an Investment Option for NRIs
The most likely question an NRI with surplus funds in the country faces is none other than “What to do with the surplus rupees that are lying idle in one’s NRO account apart from saving it in a traditional savings account or a fixed deposit ?” One of the options that often comes up while searching on Google is P2P lending. So, here is an all-inclusive guide to P2P lending for NRIs, including how it works, the eligibility criteria, the RBI guidelines, and the risk factors involved.
Although the short answer is yes, there are several restrictions and regulations imposed by the Reserve Bank of India (RBI) that an NRI must keep in mind before investing in P2P lending in India.
In order to understand how and why P2P lending works the way it does, it is imperative to first understand what P2P lending itself means.
P2P lending in brief
P2P (Peer to Peer) lending is a concept where individuals with surplus money lend it to borrowers on P2P lending platforms. These lending platforms serve as the intermediaries between the lenders and the borrowers. Thus, these platforms do not take any amount of money from either of the parties themselves. The lenders benefit from the interest repaid by the borrower. In case the borrower fails to repay, the loss is directly suffered by the lender. The P2P lending platforms registered in India are regulated by the Reserve Bank of India (RBI).
One reason why P2P lending has become such a popular source of diversification for a number of financially literate investors is the fact that the incomes from P2P lending tend to have little correlation with the stock market and the Sensex in particular. The truth is that diversifying one’s investment portfolio by including an avenue that has little or no correlation with the stock market offers stability. Thus, the potential benefit of P2P lending as a financial instrument is not its high returns but rather its ability to offer diversification.
Coming back to the main question: can NRIs participate in P2P lending in India?
The honest truth is that most of the avenues through which NRIs can participate in P2P lending in India require using the NRO account, rather than fresh remittances sent from abroad to the P2P lending platform. Thus, in most cases, an NRI participant in the P2P lending space would be lending money that he/she already has in India, rather than money sent specifically for the purpose of P2P lending. This is because, according to the Reserve Bank of India, NRIs who wish to participate in the P2P lending space in India can do so as long as they comply with the Foreign Exchange Management Act (FEMA), the current RBI directions, and the eligibility criteria required by the individual P2P lending platforms.
While the above-mentioned statement is the general rule, there are a number of caveats that come with it:
- The eligibility criteria of the P2P lending platform
- The prevailing RBI and FEMA guidelines
Thus, in order to determine if an NRI can participate in P2P lending via an individual platform it is essential to first consult the RBI guidelines for NRI P2P lending, followed by cross-verifying the eligibility criteria with either one’s bank or with a financial expert.
LenDenClub has discussed the eligibility of NRIs to participate in P2P lending in India in more detail in one of its blog posts. You may wish to read it here in order to gain more clarity on the subject.
RBI guidelines for P2P lending for NRIs:
- Prohibition on credit risk: An NBFC-P2P is prohibited from providing any kind of guarantee or credit enhancement in relation to the loans that the company facilitates. Thus, in case of default, the borrower’s loss would be suffered by the lender.
- Limits on exposure: An individual lender can only have an exposure of upto Rs.50 lakh through all P2P lending platforms collectively. In case a lender wishes to have an exposure of over Rs.10 lakhs per platform, a certificate from a registered chartered accountant with regard to a net worth of Rs.50 lakhs would be required. As for borrowers, their exposure limit per P2P lending platform is Rs.10 lakh collectively.
- Acknowledgement of risk by the lender: The P2P lending platforms are required to take an acknowledgment from lenders with regard to the risks associated with P2P lending, including but not limited to the fact that the platform itself would not be liable for the repayment of the installments.
- Escrow account: Since an NRI’s money is being transferred on a P2P lending platform registered in India, an escrow account would be maintained by the trustee nominated by the bank, thus keeping track of all transactions in order to ensure transparency between the lender and the borrower.
How to execute P2P lending for NRIs?
P2P lending platforms for NRIs
Speaking of P2P lending platforms for NRI investors, when it comes to selecting a platform for P2P lending as an NRI, the list of requirements is short but highly effective. You would first and foremost need to ensure that the P2P lending platform you choose is registered with the RBI as an NBFC-P2P. Secondly, you would need to research the tenure of the P2P lending platform, as well as its track record. You would also need to ensure that the P2P lending platform of your choice accommodates NRIs and has a smooth NRO account verification process. It is also critical to understand what methodology the P2P lending platform uses to evaluate its borrowers, as well as to recover delinquencies.
LenDenClub is India’s largest P2P lending platform boasting a track record dating back to 2015. You can view the performance of LenDenClub’s loan portfolio right here.
Is P2P lending safe for NRIs?
In short, no, P2P lending is not completely risk-free. The main risk associated with participating in P2P lending as an NRI is borrower default. Another reason why P2P lending can be quite risky is the fact that, unlike many other financial instruments offered to the general public, it does not protect your capital and does not assure you returns, despite the RBI guidelines.
To put the whole thing into perspective, when you invest in the stock market and your stocks dip in value, you have a number of ways to mitigate the damage. However, when it comes to P2P lending, your options are significantly more limited.
Thus, when it comes to P2P lending, it is more important to ask yourself if you are able to make peace with the risk factor. It bears repeating that diversification is vital when it comes to P2P lending because the loss suffered by an NRI would be directly proportional to the amount of money he/she had lent to that particular borrower.
What can an NRI expect to earn?
Now that we have talked about the risks associated with NRI P2P lending, it is only reasonable to then discuss the potential benefits. The simple truth is that the potential benefits of P2P lending are directly proportional to the risks one takes while participating in it. The RBI guidelines for P2P lending prohibit the P2P lending platforms from guaranteeing any returns as well as protecting the lender’s capital.
When you search for “can NRI invest in P2P lending in India” or about the “returns” on Google, you are bound to find a number of results telling you about the average returns one can expect from P2P lending. In reality, however, the interest rates offered by the various P2P lending platforms may differ, and the actual returns depend on how much money is repaid by the borrower.
Thus, the main reason why the P2P lending space offers such attractive opportunities for individuals seeking to diversify their financial portfolios is the fact that it allows investors to earn money outside the realm of the stock market.
Tax, and repatriation
Conclusion
For an NRI with idle funds in India looking for ways to diversify his financial portfolio without putting the entirety of his money in the stock market, P2P lending can prove to be an attractive prospect. With that being said, it is crucial to understand that P2P lending cannot be viewed as some sort of get-rich-quick scheme. It is a legitimate financial instrument, but it does come with its fair share of risks and guidelines. Thus, an honest understanding of the RBI guidelines for P2P lending, an evaluation of your eligibility, researching the P2P lending platforms that accept NRIs, and minimising risk by diversifying your investments by both amount and borrower are key factors that determine your ability to make the most out of P2P lending as an NRI.
If you are looking for more information on the subject, LenDenClub’s blog posts on why NRIs are considering P2P lending as a valuable addition to their financial portfolio, and why P2P lending makes for an attractive diversification avenue might be of particular interest to you.
Frequently asked questions
- A single NRI can only have an exposure of up to Rs.50 lakh through all P2P lending platforms combined.
- In the case of an NRI lender wanting to have an exposure of over Rs.10 lakhs per P2P lending platform, a certificate from a registered chartered accountant with regard to a net worth of Rs.50 lakhs would be required.
- An NRI borrower, however, can only borrow up to Rs.10 lakhs per P2P lending platform.
- An NRI P2P lender can only utilise funds that he/she already has in India rather than fresh remittances from abroad.
- A P2P lending platform cannot provide any kind of guarantee or credit enhancement about the loans it facilitates.
- The P2P lending platforms maintain an escrow account which is operated by the trustee nominated by the bank to ensure that all transactions between the lender and the borrower are transparent.
Team LenDenClub
LenDenClub is India’s largest peer to peer lending platform which started operations in India in 2015. We have been helping lenders diversify their portfolio beyond traditional investment instruments ever since.