Peer-to-Peer lending is finding its way in India and is fast gaining popularity among investors looking for unconventional ways to earn good returns on their investments.
However, like all other regulated products (MFs, equity, bonds etc.), this promising sector too is not without its risks. In P2P lending, risk is related to the probability of borrowers defaulting on payments and the underlying loan repayment performance which involves lenders in getting their loans repaid. So, it is important to ask your client to do their homework before they lend.
Here are some risk mitigation strategies which your client can implement in P2P lending:
- Check the platform's credit rating of borrower- Your client can easily minimize the risk of lending by checking if the borrower is creditworthy. P2P platforms enlist borrowers after checking their creditworthiness through different processes. So, make it a point to understand the method in which the P2P platform enlists its borrowers as your client won’t meet the borrowers enlisted on that platform personally.
The more thorough the credit rating process, the higher the chance of finding good borrowers and the risk would automatically reduce.
- Check the borrower’s creditworthiness yourself - Risk mitigation should continue even after the lender and borrower reach an agreement. Ask your client to look for the creditworthiness of the borrowers personally even after he has assessed the platform's rating process. Closely assess the insights provided by platforms to understand his capability and intention to repay.
- Diversification of portfolio - Diversification is a crucial step that many P2P lending platform such as Monexo offer to lenders to mitigate risk. Investing small amounts across a large number of borrowers is likely to keep the default rate at a reasonable and consistent level. Segregate your investments and choose borrowers from different segments to lend to. This way, your clients can minimize the risk of default.
- Insurance scheme to protect lender’s principal against event based risks- Ask your clients to tie-up with life insurance companies that will help them avail insurance to protect themselves from default in case of unforeseen situations like accidents, sickness, and death of the lender.
- Look for a platform that assists in loan recovery- Borrowers might still default on their loans even after one takes precautions. To mitigate the risk of losing investment, ask your client to register on those platforms like Monexo that have a support system in place to help you to collect on defaulted loans.