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Peer to Peer Lending How to advise your clients on P2P lending

How to advise your clients on P2P lending

Here is how you can popularize P2P lending among your clients.
Team Cafemutual Nov 16, 2017

One of the more recent entrants in the financial services industry is peer-to-peer lending or P2P lending. This asset class has been attracting many investors. In fact, Orca, Irish-based Investment research firm has predicted that over 2.7 million will become lenders on P2P lending platforms by 2020, globally.

P2P lending in India is regulated by the Reserve Bank of India. It enables individual investors and borrowers to transact through an online platform by completely cutting out banks. P2P lending platforms like Monexo function through an online marketplace where loans that meet credit standards of the platform are listed on a daily basis for the investors to log in and invest.

IFAs should explore this new world of P2P lending space to increase their offerings. Here are some key pointers that will help you market this new asset class among your clients.

  1. Take time out to educate yourself about the asset class

While P2P lending may be a relatively new asset class in India, it is a decade old industry globally. There is enough online material available on simple concepts ranging from expected returns, portfolio construction and risk mitigation. Being a new product, your clients are sure to ask basic questions around investment process, level of risk, regulatory framework and P2P platform’s credibility. So, before taking the product to a client, spend enough time to educate yourself about various dimensions of online P2P lending.

A starting point for your research is to reach out to the P2P platform asking for basic learning materials. At CafeMutual, we have a host of articles pertaining to various concepts on the asset class which you can use as a reference point.

  1. Marketing is imperative

Once you have understood the product about how it can benefit your clients, it is crucial to begin seeding the P2P concept in the minds of clients.

It is safe and wise to assume that most of your clients would not have heard about P2P lending yet. So, marketing is imperative but it also has to be done with a certain level of frequency and prudence.

P2P lending may not be an investment product for all your clients – so it is important to focus on marketing the asset class to investors who are generally (i) young (ii) online savvy and (iii) appreciate wealth creation and (iv) have a basic risk appetite.

Once you have identified a relevant list of your clients you want to market the product to – it is important to educate them about their present portfolio and the incremental advantage which P2P lending can provide as a short term, high yield asset class. Benchmarking P2P lending to showcase its return potential against a bank fixed deposit, debt fund investment will be good starting points to seed the concept.

  1. Budget for % of clients’ portfolio to be invested in P2P lending :

P2P lending is not meant to replace your client’s portfolio. It is an additional asset class that blends with the investor’s existing portfolio and adds more value to it. Being an alternative asset class, typically 15-20% of your client’s existing portfolio can be allocated for P2P lending.

  1. Be upfront about the risk. Also be clear about how risk is mitigated.

Like all other regulated products (MFs, Equity, bonds etc) – P2P lending also involves risk. In P2P lending, risk is not market related. It is related to the probability of borrowers defaulting on payments and the underlying loan repayment performance. So, ensure that clients are aware that returns are not guaranteed.

Having said that, managing and reducing default risk in P2P lending is possible.

For instance, Monexo, one of the leading P2P platforms follows six different ways to mitigate borrower default risk.

1) Robust borrower screening inclusive of anti-fraud checks

2) Eligibility criteria to evaluate credit worthiness and loan eligibility for borrower through partnership with CIBIL and other credit bureaus

3) Diversification of lending portfolio  - A lender can lend as low as INR 1000 / per borrower and ensure that capital exposure per borrower is limited

4) Insurance scheme to protect lender’s principal against event based risks

5) Provision of robust collections support to collect delayed payments from borrowers (if any)

  1. Highlight P2P lending as an investment opportunity with monthly cashflow, better returns and low volatility :

Returns from P2P lending depend on the loan interest rates, tenor and repayment performance of underlying loans. You can help your clients make a portfolio of loans with a curated mix of low, medium and high risk loans. You can reduce downside risks by such a diversification.

P2P lending has an edge over traditional market-linked investments in terms of returns predictability. P2P lending is a debt instrument. The interest rates range between 12% and 30% based on credibility of borrowers. The rates are fixed and payouts are regular. P2P lending can also help investors generate regular fixed monthly income.

So, make sure your clients are educated about the benefits of the asset class. This will go a a long way in helping you be successful in marketing P2P lending as an asset class your clients will be excited to invest in.

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