P2P Finance - As an investing asset class!

Continuing the discussion from Your current Favorite Finance Feature?:

Hey folks what has your experience been with P2P financing as investment avenue?
What are the platforms you are using and what stood out?

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The nacent stage of the industry and the lack of trust makes it difficult to invest in P2P lending. I had invested 3 years back to test the waters and I am exiting this with a loss.

Though the returns look mouth watering, I would suggest you to not enter the business unless you can trust the platform to do the recovery for you. As some others pointed out there were cases of platforms exiting the business in China leaving lenders stranded(If the borrower is in some other city how will you even recover your money).

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Thanks for sharing your experience. I had heard of some platforms which diversify the investment across multiple borrowers. Any idea if that model works better?

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I have been using faircent from last 2 years which was the oldest in this i guess and the leader. In my opinion stay away. Even if you want start small maybe with 10000 rs and also only lend to borrowers which are the most risk free. Like 18% or 19% ones. Too much NPAs and collections are bad for defaulters. I have lost a lot of money. Stay away i would say!

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P2P finance is obviously not risk free. Heard of lendbox trying to make it slightly better by having guarenteer for each of the loans. But still no return in the market comes risk free.

If it is giving 14% risk free everyone would invest in it right ?

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P2P platforms, unless they come with a buyback guarantee for lenders - they are a bad investment source regardless of the Investment size.

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P2P lending companies were all rage at one point of time but due to assets decreasing and a lot of inherent unsecured risk (even though distributed) is a risk that investors don’t want.

What @DINESH_CHANDRASEKARA is mentioning is rather than lending to the end user, you lend to a lending company which gives some sort of a guarantee to the platform and hence is slightly more secure. PFA the images:

But when you start understanding the reasons why these companies are able to give a guarantee is that they take the risk of non payments on themselves. But what happens if such a lendor goes down is yet to be seen.

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Hi Goldi,
Regarding what you shared, from my perspective, we are following China model in P2P lending.
And in China, P2P had a lot of negative experience, and the Chinese government had to bring the P2P concept down.
That’s what exactly is happening in India now too.

Regarding Mintos, I feel that’s the model can be followed in India too. I have a perspective that, if done properly in India, it can help NPA Reduction for banks, as well as some additional income for retail investors too, if there is a buyback guarantee.

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Alright this comes from experience, don’t indulge in P2P lending. If someone defaults in a far away city there is not much you can do.

I choose the so called best credit rated borrowers on the platform.
2/4 of my borrowers defaulted (1 straight ghosted me) and I had no option but to wait for the platform to follow up.

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Borrowers come to these platforms because their credit scores are bad and banks would not lend. The threat of impacting credit score is not useful for these kinds of borrowers.

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How are the borrowers vetted by the platform, is it just by cibil score? Also if the borrower doesnt pay what is the way to recover? Is it just to wait and threaten to impact their credit score?

That’s why P2P platforms are not scaling in India . Their ability to underwrite and provide trust to consumer doesn’t exist

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@AshishBhalla
According to RBI regulations the platform has to provide lenders with a way to recover debt. Platform generally outsources this to a third party who try to recover and charge you a percentage. The platform co-ordinates this and you have to speak to the platform team to get the updates. My experience is that this is not useful and my debt is still in defaulted state from past 2 years; with the only progress that happened was that they sent legal notice to the borrower.

Help me out here: hdfc Bank gives you 20% growth. Defaulters default on big name bank loans. Chit funds give easy 15% return. Why choose P2P?

Hey Shivam, interesting PoV. You suggest investing in HDFC equity shares over P2P?

I still have the perception of looking at P2P as fixed income asset class as opposed to equity.
Also how does one trust Chit Funds? Considering they are not regulated by the RBI. Also after seeing the Sahara Fraud (Chit fund right?) can’t trust them.

What do you think are the risks that come with chit funds?

Things I wish I understood before I started

  • Faircent will take their cut from the first repayment. So they get their fees as soon as someone makes 1 payment. Afterwards it is your headache if the rest of lending goes to drain. Collection charges? You pay them.
  • The stats they show are “stats”. Based on a large number of loans. Faircent as of today shows “Very high risk” having the following numbers - 28% return. Net return 18% after loss of 10%. What they do not make easy to understand is that to get these numbers you need to have a large amount invested. From statistics point of view this makes perfect sense. But as an individual your experience would vary wildly if your amount is not large enough.
  • Quarterly Advance tax payment liability. I had to start paying advance taxes because there is no TDS. If I knew this I would have probably never started P2P Lending simply because of the quarterly hassle.
  • Pay taxes at slab rates
  • You cannot square off your losses against your interest or any collection charges. So pay taxes on your interest and lose your money too.
  • There is a disbursal time period in which you don’t get any returns. I tried disbursing some amount and it took them 1 month to disburse it. What do you get for that time period? Nothing.
  • They will not show you XIRR but instead show an absolute return.
  • their reports have rounding errors. This is shameful (maybe illegal, not sure) that an NBFC has reports with rounding errors. I told faircent about these rounding issues in 2018 but those have not been fixed yet in 2021. Let that sink in. A NBFC dealing with money has rounding errors in their reports which was reported to them nearly 3 years ago but has not been fixed yet. Not large rounding errors but few rupees in every loan will add up.

It is not that these were not written anywhere. Most of it is written. But good luck figuring this all out by reading the various blog posts that they write before investing.

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Super thread and such a detailed note on P2P asset class. I am glad to see that such kind of insights are being shared by community members and benefit other community members.

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Welcome to the community Aseem!

The first and third I was not aware of so far! Already repenting starting the journey of P2P investing!

there is one other reason why providing guarantee might not be possible. As per RBI regulations, the P2P platform can only process the loans and can’t itself provide any form of guarantee. All the payments are also procesed through an escrow account mechanism and the P2P platform seemingly may not have control work the money.

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