Emergence of P2P Lending: When Banking Meets Risks

Peer-to-peer (P2P) lending is emerging as an alternative investment avenue. P2P lending platforms allow you to lend your money to a borrower for an agreed rate. In theory, you run the risk of defaults from the borrowers. In practice, lending platforms tend to absorb losses that are within their buffer. This helps minimize potential losses and the practice resembles the principles mandated by BASEL III capital norms for banks. The risk is that it creates a false sense of security among investors. Initially, the idea was to connect lenders with individual borrowers directly but over time P2P lending has evolved to bring in an interesting mix of borrowers, diversifying potential opportunities within the industry.


P2P lending operates via two avenues: a traditional model connecting investors and borrowers directly, and where investors’ funds are disbursed via partner P2P non-banking financial companies (NBFCs), wherein a P2P platform serves as a sourcing partner for a P2P NBFC, which then lends to its own borrowers. Prominent players include 12% Club (Bharatpe), Cred, Mobikwik, and FI.

Certain partner P2P NBFCs allocate the capital toward Buy-Now-Pay-Later (BNPL) and no-cost EMI financing. According to data from P2P firms, BNPL and no-cost EMIs contribute to 55-60% of assets under management, while business loans are 35-40%. Traditional P2P lending constitutes a smaller portion, at 5-10%.

In traditional P2P lending, borrowers meet investors online to request for loans with varying amounts, interest rates, and tenures. The lending platform assesses the creditworthiness of a borrower through ratings or credit checks, or by leveraging artificial intelligence and machine translation algorithms to filter borrowers. Some companies adopt unique underwriting processes, such as physical verification and social credit principles. “We focus on women businesses and try to physically verify borrowers’ credentials and work on the principles of social credit under-writing: the Grameen Bank Model.” said Neha Juneja, founder, IndiaP2P.

Interest rates on P2P platforms differ. BNPL and no-cost EMI involve fees of 10-20% per transaction, while business loans carry rates of 18-30% per annum. Traditional P2P lending can offer 15-40% interest per annum.

P2P platforms priorities risk mitigation by diversifying exposure across 200-300 borrowers, using AI and ML matching algorithms.

Investor returns in P2P lending can be 8-12%, depending on loan portfolio performance and NPAs or non-per-forming assets. It charges borrowers an MR of 21-25%, with 3-6% as a platform fee, and 7-9% for maintaining a safety margin. The remaining 8-12% is paid to investors. However, the returns are not guaranteed, as NPAs can impact actual returns. Defaults are typically absorbed within the 7-9% safety margin.


Fintechs like Bharatpe (12% Club), Cred (Mint), Fi, Lendenclub and Faircent, are major P2P firms. Returns depend on whether they follow traditional P2P methods or lend through partnerships.

The borrower profile also makes a difference to the final returns. Liquiloans popularly referred to as SBM Bank of P2P lending, serves as a partner P2P NBFC for most tech firms such as Cred, Bharatpe, Fi, and Slice, which recently launched their own P2P products. In addition to these partnerships, Liquiloans offers a direct investment option through its platforms.

For borrowers, Liquiloans has partnered Upgrad, Dr.Batra, LifeCell, Propelld, Livspace, and DesignCafe, to tap into their customer base seeking loans. It offers no-cost EMI and BNPL services.

Though LiquiLoans claims to be the only rated P2P platform, only 6% of its loans underwent a pass-through Certificate transaction, rated by ICRA. However, this rating was later withdrawn as P2P NBFCs, such as LiquiLoans, neither lend on their own books nor sell loans.

PTC transactions involve bundling and rating loans when an NBFC raises capital by selling its loan book. As Liquiloans does not lend on its own books, such transactions are not applicable.

LiquiLoans gross NPAs were below 1.3% during covid. Now, its gross NPA stands at 0.8%. It claims zero net NPA since gross NPAs are absorbed by buffer (interest rate spread), while Faircent has the highest gross NPA of 9.6%. In case of partnership models, investors must dig deep and check NPA of the partner P2P NBFC, as the primary platform is just a sourcing platform and will not have NPA.


The major risk in P2P lending is the default risk as they cannot guarantee loans. The platform charges an IRR of 21-25% to borrowers, of which 3-6% is platform fee and 7-9% is for maintaining margin of safety.

However, if NPAs go beyond this, investors may start losing their principal with no collateral to cover losses. In India, some P2P sites saw default rates of 10-12%, highlighting the importance of assessing risks before investing.

Note: even though P2P lending is regulated by RBI, there is no insurance or guarantee against loan defaults, unlike banks that insure deposits of up to 15 lakh through Deposit Insurance and Credit Guarantee Corp.

Courtesy: Akshat Rohatgi, Mint Publication

These kind of returns are expected from P2P lending:

LiquiLoans plan details.

SchemeReturn RateTenureMinimum Investment
Fixed term8.603 MonthsMinimum investment of Rs- 50,000.
Fixed term9.006 MonthsMinimum investment of Rs- 50,000.
Fixed term9.2512 MonthsMinimum investment of Rs- 50,000.
Fixed term9.4024 MonthsMinimum investment of Rs- 50,000.
Fixed term9.5036 MonthsMinimum investment of Rs- 50,000.
Liquid Plan8.000 MonthsMinimum investment of Rs- 50,000.

Lendbox Plan Details 

SchemeReturn RateTenureMinimum Investment
Fixed term11.0012 MonthsMinimum investment of Rs- 50,000.
Liquid Plan9.500 MonthsMinimum investment of Rs- 50,000.