P2P lending, a new fad or a good diversification solution
P2P lending, a new fad or a good diversification solution
What does P2P lending mean
P2P Lending, also known as Peer-To-Peer Lending, is a marketplace that connects borrowers and investors without geographical restrictions. In the Indian context, this connection is facilitated by a platform holding an NBFC P2P license, as mandated by the RBI for any platform involved in this process.
There are 25 NBFC-P2P licenses allotted by the RBI in India. Some of the companies that let you invest in P2P lending
- Faircent
- IndiaP2P
- Lendbox
As part of our commitment to simplify and broaden access to the investment asset class, today, we are deep diving into a detailed exploration of our P2P lending partner platform, Lendbox.
Partner Profile
| Brand Name - Lendbox |
| Parent Company - Transactree Technologies Private Limited |
| Founded in 2015 with Head Office in New Delhi |
| Registered with RBI as NBFC-P2P under license number N-14.03462 |
| Number of Employees - 125+ |
| Annual GMV - ~Rs. 4500 Cr |
| Current AUM (Dec 2023) - Rs. 2600+ cr |
| # of Investors with active portfolio on Lendbox - 4,80,000+ |
| Stage of the Company - Growth Stage and Profitable |
| Founders - Ekmeet Singh, Bhuvan Rustagi and Jatin Malwal |
| Investors - IvyCap Ventures, Orios Venture Partners |
| Vision - To be a one stop shop for stable Wealth creation |
The Founders
Co-Founder & CEO
Co-Founder & CEO
- MBA - IE Business School 14+ years of experience in Investments and Consulting
- Early Stage Investments @GSF Accelerator and Real Estate Investments
- Supply Chain Consulting @ Accenture in India and Sweden
Co-Founder & COO
Co-Founder & COO
- MBA - IE Business School 13+ years of experience in Investments and Consulting
- Assurance and M&A Expert
- Worked at Alvarez and Marasal, India and PwC, Tanzania
Co-Founder & CTO
Co-Founder & CTO
- Software Engineer with 10 years of experience in building tech productsSoftware Engineer with 10 years of experience in building tech products
- Co - Founder Playselfie, a selfie sharing social media platform
- Worked at Snapdeal and Inoxapps built products with 10M+ usersWorked at Snapdeal and Inoxapps built products with 10M+ users
How does P2P work under RBI regulations
The borrowers are connected to lenders through a RBI registered platform and they have to follow RBI’s Master Directions for NBFC Peer-to-Peer Lending Platform, issued in 2017:
- Only NBFC - P2Ps are allowed to register as P2P lenders with explicit permission from the RBI.
- All existing and non-NBFC P2P should get themselves registered with the Department of Non-Banking Regulation.
- P2P lenders should obtain a certificate of registration from the RBI.
- P2P platforms should maintain a net-owned fund of at least Rs 20 million, besides fulfilling other conditions laid down by the RBI.
- The leverage ratio (Debt : Equity) for P2P lenders should not exceed 2.
What do these regulations mean
- The money should not be on the books of the P2P platform, it is sent from the lender to the borrower via a trustee approved escrow account
- No guarantee, security, credit enhancement or anything else that is beyond the RBI guidelines can be done
- The platform will earn a fee for the services provided to the borrower to get a loan and to investors for facilitating such investments
- Lenders and borrowers must register on the P2P lending platform.
- Every P2P platform conducts screening tests, KYC and AML check procedures to verify potential lenders and borrowers.
How does Lendbox source borrowers?
Lendbox has been successful in carving a niche for itself in the P2P lending industry, primarily attributed to its consistent delivery of double-digit returns to investors over multiple years. The platform's remarkable growth is underscored by its lower non-performing assets (NPAs) compared to other players in the digital lending sector.The controlled risk exposure at Lendbox is a result of its distinctive approach to borrower sourcing. Instead of engaging in direct competition, Lendbox collaborates with digital lenders who hold category leadership in their respective spaces. Employing over 300 credit risk checkpoints, Lendbox meticulously evaluates and accepts only top applications through these sourcing partners. Some notable collaborators include Navi for Personal Loans, Snapmint for No-cost EMI loans, UNI for Line of Credit, Khatabook and Rapipay for Merchant financing, among many others.Current NPA Levels being less than 1%
What are the kind of loans
A big part of the sourcing of right borrowers is to identify the right kind of loans, which are spread across 4 main categories -
Zero Cost EMIs or Subvention based loans: A preferred option for buyers, these loans incur no extra cost, maintaining high repayment rates. Historically, zero-cost EMIs have demonstrated strong performance, establishing themselves as one of the most creditworthy loan forms.
The seller of the goods or service bears the interest cost through subvention, making these loans an appealing choice for borrowers and a low-risk investment opportunity for both retail and high-net-worth investors.
Merchant Loans: Tailored to address the working capital requirements of small businesses, the creditworthiness of borrowers is evaluated using a credit scoring model that considers their daily sales through QR codes.
For loan sourcing partners like Khatabook, Rapipay, and OkCredit, the installment amount is divided into daily installments, and it is settled based on the daily QR code sales.
Lendbox collaborates with merchants who have a proven track record of working with their partners, and limits are determined solely based on their daily QR code sales.
Personal Loans: Lendbox adopts a highly selective approach to its personal loan portfolio, focusing exclusively on the top 2% of the most creditworthy borrowers within this category.In pursuit of this goal, Lendbox has collaborated with CRISIL 'A' rated loan partners, such as NAVI FINSERV, who demonstrate average CIBIL scores exceeding 750 and possess an average salary of Rs. 72,000.
Line of Credit: Offering short-term revolving credit to individuals with high creditworthiness in collaboration with UNI, this service caters to regular personal expenses.
What are the investment plans
On one side of the platform are borrowers subjected to stringent checks by Lendbox to minimize losses. On the other side are investors seeking an Investment avenue that is more stable and predictable. Typically, investors allocate 7-10% of their investable capital on Lendbox, drawn by its established track record of delivering double-digit risk-adjusted returns. Following are the different investment products offered by the company.
Fixed Term Plans: Here you have to be locked in for the duration you choose for investing
- 3 Month - Upto 10.09% Per Annum
- 6 Month - Upto 10.73% Per Annum
- 12 Month - Upto 11.57% Per Annum
Flexi Plans - Here you have the option to take out your money whenever you want, the liquidity is on a best effort basis. Returns are upto 9.5% Per Annum
How does Lendbox offer Flexi Investment plan
The majority of investments on Lendbox occur through the automated Investment option. Investors set their criteria, and the system automatically executes transactions based on these preferences. This method proves highly efficient as Lendbox's proprietary AI-based engine can diversify funds in transactions as low as Rs. 100 in each loan—a task nearly impossible to achieve manually.
In the flexi investment option, Lendbox provides liquidity to outgoing investors through the secondary sale of their portfolio to the next incoming investor. Leveraging the scale of operations and running an efficient secondary sale mechanism, Lendbox achieves this within a few minutes. In most cases, Investors receive their redemptions within the same day.
For a more comprehensive understanding, one has to understand the cash inflow and outflow dynamics of the system. Cash inflows originate via two sources - fresh deposits made by investors on the Lendbox platform and repayments from various loans. Conversely, cash outflows occur during redemption/payouts to Investors or fresh loan disbursals,
As a testament to Lendbox's commitment to an efficient flexi investment plan, the platform prioritizes redemption/payouts to investors over fresh loan disbursals.
Additionally, loan tenures on the platform are deliberately kept short to minimize asset-liability mismatch. Funds invested in the flexi investment plan are predominantly invested in subvention-based loans (where interest is received upfront) or daily interest payment loans. As the investment generates daily interest income, it is accrued in the investor’s account at the end of the day.
With these considerations in mind, Lendbox provides liquidity in the flexi investment plan on a best-effort basis, ensuring that the process remains compliant, transparent, and operates within the legal framework.
Understanding the risks
As with all investments, it comes with a set of risks to your returns and to your capital. Investments on any P2P lending platforms are subject to credit risk. However it is important to understand various risk control and risk mitigation strategies for platforms before investing through them.
Lendbox has a proven track record of being able to generate more than expected returns for investors 100% of the time for over 3 years.
How are you protected for defaults?
In accordance with the RBI’s Master direction, Investors are exposed to risk of default and there are chances of principal loss as well. However, Lendbox has implemented robust systems for risk assessment, control, and mitigation, ensuring investors are exposed to limited risk. This, coupled with the meticulous selection of top-quality borrowers, has consistently yielded high yet stable returns for investors.
Furthermore, diversification stands out as a key risk mitigation strategy on the platform. Lendbox strategically diversifies investors' portfolios across various loan types, geographies, ticket sizes, and borrower segments. Their proprietary AI-based engine enables the diversification of a Rs. 10,00,000 investment into 4000+ loans. The extensive diversification of an investor's portfolio facilitates the achievement of stable returns at the portfolio level.
Additionally, Lendbox employs standard recovery mechanisms, including both soft and hard recovery approaches, similar to those applied by other financial institutions. Impressively, their gross NPAs are maintained at less than 1%.
Additionally, Lendbox's commercial model is intricately linked to portfolio performance for investors. In cases where investors achieve returns lower than expected returns, Lendbox commits to forgo any fees. As a profitable organization, they demonstrate the ability to generate sufficient margin to cover fixed expenses while still yielding profits.
Understanding hypothetical end of world scenarios
What is the worst that can happen?
Aligned with the regulatory guidelines set by the RBI, Investors are exposed to credit risk, and the possibility of principal loss exists. As mentioned earlier, P2P platforms are not allowed to offer credit guarantees or extend loans from their own resources. Nevertheless, Lendbox has implemented several risk mitigation strategies to minimize investor exposure to such elevated risks. These strategies encompass the selection of the top 2% of the most creditworthy borrowers in India, diversification of investor funds starting from as low as Rs. 100 per transaction, and a commercial model where Lendbox only earns fees when investors achieve their expected returns.
At what level i will lose my returns
The portfolio-level gross returns for Lendbox typically fall within a range of 21-23% pa, and Investors can anticipate returns ranging from 9-11.5% pa. This implies that investors would still realize expected returns even if up to 10-12% of their portfolio encounters defaults. Lendbox's commercial model operates on a rear-end basis, meaning that Lendbox will not make any money if the investor's actual returns fall below the expected returns.
At what level i will lose my capital
Principal loss for investors would occur when defaults surpass 21-23% of Lendbox's portfolio. Notably, Lendbox has experienced a maximum default rate of under 5% over the past 8 years, even amid the challenges posed by COVID.