How does P2P lending work in India? How safe is P2P lending?
Deepak and Shray explore how the industry works, the risks involved
and whether the returns are enough to justify the risks.
Banks keep a considerable spread between the interest they
offer on a deposit and the interest they charge a borrower. So,
some people think, why is the spread so big? Why can't I deal with
the borrower directly and receive more interest on my money?
The problem is you don't know the person you are going to be
lending money to. In comes the P2P lending company, which acts as a
sort of intermediary between the lender and borrower.
When you give your money to a bank (as a deposit), the bank
will guarantee that you will get your money back. But in the case
of P2P lending, there is no such guarantee that you will get your
Another problem with P2P lending is, no one outside knows the
actual default rates, and they are often much higher than what
these companies report, even though the whole operation is
In P2P lending, you don’t see one of the three Cs of lending –
you don't have collateral; you have capacity and
One of the reasons why P2P companies have flourished is that
banks, which should ideally lend money to people whose credit might
be questionable, don't lend to them. But the answer is not to
'lend' them money. You can consider it as a form of charity, in
which case, even if you don't get the money back, you don't mind
losing it. And there are companies that work on this model.
An alternative could be microfinance. But there are problems
there too. Often, multiple microfinance companies want to lend to
the same borrower, who uses the money for purposes other than what
they were intended for, with the result that they are not able to
But microfinance companies can take this pressure because they
are a company. A P2P lending firm is just an intermediary. They
have no way to recover the money if a borrower refuses to pay,
except send legal notices (because there is no collateral), which
may not work.
So, the gist is, if you want to give loans through a P2P
lending firm, only lend so much that you won't mind even if you
lose the money. Give it for charitable purposes. Give it to people
who are in such bad shape, they can't afford anything else.
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