If you are contemplating investing money to earn high returns, there are numerous options such as stocks, mutual funds, small savings schemes, fixed deposits (FDs), sovereign bonds and corporate debt, among others. While investors are already spoilt for choice, there is another not-so-popular investing option — peer-to-peer (P2P) lending.
A few Reserve Bank of India (RBI)-registered NBFCs offer this option to retail investors to earn high returns.
Those who are not aware, these platforms enable individual investors to extend small advances to borrowers to earn high returns. The money does not exchange hands directly between the peers. It is kept in escrow accounts before being transferred from lenders to borrowers.
RBI-regulated NBFCs
The entire process of borrowing and lending is regulated by the which has capped the amount which a lender can give to a borrower at ₹50,000.
In other words, if an investor wants to invest ₹1.5 lakh, they would have to lend ₹50,000 to three different borrowers, thus decentralising the risk involved. Additionally, the aggregate exposure of a lender (and borrower) across all P2P platforms is capped at ₹10 lakh.
This sector initially came under RBI regulation in 2017. Later, in August-September 2024, the central bank tightened norms, prompting several platforms to scale down or shut their operations.
One of the most effective tools a P2P lender offers is diversification. Spreading capital across a large number of borrowers, rather than concentrating it in a few, ensures that a default would have a limited impact on overall returns.
“Lending platforms operating in this space must be registered as Non-Banking Financial Companies (NBFCs) with the RBI, which establishes guidelines for their operation. Such platforms are required to open escrow accounts in a secure bank to prevent potential fraud by the platform itself,” says Preeti Zende, a Sebi-registered financial advisor and founder of Apna Dhan Financial Services.
Since interest rates are charged to based on their creditworthiness, the income which investors can earn is also not fixed.
Should you invest?
Investing in peer-to-peer lending delivers a high rate of return. The return they earn on their investment is typically higher than what banks offer on their (FDs) and typically hovers in the range of 10 to 15% a year.
“A well-constructed P2P portfolio can evolve into a source of passive income, regular interest payments flowing in as borrowers repay their loans,” says Mohan Parsuramka, COO and Head of Business, P2P at 1 Finance.
However, not everyone believes that peer-to-peer lending is good for retail investors. Some experts believe that P2P lending carries a high risk. “Given the high risk associated with P2P lending, I do not recommend investing through such platforms, as they are not suitable for retail investors who prioritise goal-based investments,” adds Zende.
“The opportunity comes with an equally important caveat: these loans are unsecured. There is no collateral backing the credit. If a borrower defaults, the loss sits with the lender,” adds Parsuramka.
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