P2P Lending

Full form: Peer-to-Peer Lending

Investments

P2P lending platforms connect individual lenders directly with borrowers, bypassing banks. In India, P2P platforms are NBFC-P2P entities regulated by RBI. Lenders can earn 10-24% returns, but face significant credit risk -- borrowers on P2P are often those who cannot get bank loans.

In detail

RBI P2P regulations:nMaximum lender exposure per borrower: Rs 50,000nMaximum total investment across all P2P: Rs 50 lakhnMaximum single loan per borrower on platform: Rs 10 lakhnPlatform cannot promise returns or guarantee principalnnMajor Indian P2P platforms: Lendbox, Faircent, LenDenClub, Finzy.nnRisk: significantly higher than FDs or debt MFs. Defaults are real. Diversify across 100+ borrowers to reduce concentration risk. Returns of 12-15% possible but 20-30% default rates on some platforms have eroded returns.

Formula

Net P2P return = Gross yield - Default rate - Platform feesnAt 18% gross, 8% default, 1% fee: net = approximately 9%

Real-life example

🇮🇳 India example

Arun invests Rs 3L in P2P, distributed across 120 borrowers at Rs 2,500 each. Gross yield: 17%. Platform fee: 1%. Default rate: 7% (7 borrowers default fully). Net effective return: approximately 9%. For the same expected return at lower risk: an arbitrage fund gives 7% with near-zero default risk.

Frequently asked questions

Is P2P lending safe for investment? ▼

Higher risk than any regulated investment. Principal is not guaranteed. RBI regulations provide some protection but cannot prevent borrower defaults. Use only a small portion of portfolio (max 5%) and only amounts you can afford to lose partially.