P2P lending in India. How does it work and are the risks worth it?

11/15/21 • 64 min

How does P2P lending work in India? How safe is P2P lending? Deepak and Shray explore how the industry works, the risks involved and whether the returns are enough to justify the risks.

Summary

Banks keep a considerable spread between the interest they offer on a deposit and the interest they charge a borrower. So, some people think, why is the spread so big? Why can't I deal with the borrower directly and receive more interest on my money?
The problem is you don't know the person you are going to be lending money to. In comes the P2P lending company, which acts as a sort of intermediary between the lender and borrower.
When you give your money to a bank (as a deposit), the bank will guarantee that you will get your money back. But in the case of P2P lending, there is no such guarantee that you will get your money back.
Another problem with P2P lending is, no one outside knows the actual default rates, and they are often much higher than what these companies report, even though the whole operation is legal.
In P2P lending, you don’t see one of the three Cs of lending – you don't have collateral; you have capacity and creditworthiness.
One of the reasons why P2P companies have flourished is that banks, which should ideally lend money to people whose credit might be questionable, don't lend to them. But the answer is not to 'lend' them money. You can consider it as a form of charity, in which case, even if you don't get the money back, you don't mind losing it. And there are companies that work on this model.
An alternative could be microfinance. But there are problems there too. Often, multiple microfinance companies want to lend to the same borrower, who uses the money for purposes other than what they were intended for, with the result that they are not able to repay.
But microfinance companies can take this pressure because they are a company. A P2P lending firm is just an intermediary. They have no way to recover the money if a borrower refuses to pay, except send legal notices (because there is no collateral), which may not work.
So, the gist is, if you want to give loans through a P2P lending firm, only lend so much that you won't mind even if you lose the money. Give it for charitable purposes. Give it to people who are in such bad shape, they can't afford anything else.

Read the full transcript.

How does P2P lending work in India? How safe is P2P lending? Deepak and Shray explore how the industry works, the risks involved and whether the returns are enough to justify the risks.

Summary

Banks keep a considerable spread between the interest they offer on a deposit and the interest they charge a borrower. So, some people think, why is the spread so big? Why can't I deal with the borrower directly and receive more interest on my money?
The problem is you don't know the person you are going to be lending money to. In comes the P2P lending company, which acts as a sort of intermediary between the lender and borrower.
When you give your money to a bank (as a deposit), the bank will guarantee that you will get your money back. But in the case of P2P lending, there is no such guarantee that you will get your money back.
Another problem with P2P lending is, no one outside knows the actual default rates, and they are often much higher than what these companies report, even though the whole operation is legal.
In P2P lending, you don’t see one of the three Cs of lending – you don't have collateral; you have capacity and creditworthiness.
One of the reasons why P2P companies have flourished is that banks, which should ideally lend money to people whose credit might be questionable, don't lend to them. But the answer is not to 'lend' them money. You can consider it as a form of charity, in which case, even if you don't get the money back, you don't mind losing it. And there are companies that work on this model.
An alternative could be microfinance. But there are problems there too. Often, multiple microfinance companies want to lend to the same borrower, who uses the money for purposes other than what they were intended for, with the result that they are not able to repay.
But microfinance companies can take this pressure because they are a company. A P2P lending firm is just an intermediary. They have no way to recover the money if a borrower refuses to pay, except send legal notices (because there is no collateral), which may not work.
So, the gist is, if you want to give loans through a P2P lending firm, only lend so much that you won't mind even if you lose the money. Give it for charitable purposes. Give it to people who are in such bad shape, they can't afford anything else.

Read the full transcript.

Previous Episode

Term Insurance: Why and when do you need it?

Episode 41 - Deepak sits down with returning guest Ruchir Kanakia, the founder of the insurance distribution company OneAssure to discuss our favorite insurance product - term insurance.

Summary:

How term insurance works for you and the company that sells it to you
Debt or Dependents – the two reasons to buy term insurance
How Covid and the fact that a handful of reinsurers control everything has made your office insurance a bit less reliable – consider buying a personal one too
How much coverage is enough and how much the insurance company will give you
Why you should opt for the in person medical test
You’re tech or finance savvy but consider getting an agent or distributor if your dependents might not be
Common riders and why you should ignore them
How the claims process works and benefits of selecting a monthly or yearly premium payment

Click here for the full transcript.

Next Episode

Why SEBI doesn’t want you getting advice from unregulated algos

With technology comes great responsibility, says SEBI, as it attempts to regulate the algorithmic trading markets that have just started to evolve in India. The concept of “API” trading, through Application Programming Interfaces is the standard in the web and app-based world, but SEBI doesn’t want you to manage your own money programmatically. Or, worse, to give it to someone else who is “unregulated” to manage your money through an algorithm either.

In this episode we discuss SEBI’s recent consultation paper on algorithmic trading and how it impacts you. What roles do algorithms play in managing your money and will a program be investing on your behalf in the near future.

SEBI published a consultation paper on algorithmic trading by retail investors on Thu Dec 9 2021
The paper impacts any form of “automated” trading: through a broker provided API in general as well as Algo Trading
An example of an Algorithm that already exists - Good Till Traded orders offered by your broker. They place an order automatically every single day through a program.
Algorithms that would help retail investors- “Buy/Sell this stock if it falls 10%”, or manage the extreme risk on my portfolio (insurance, of sorts).
The motivation for this paper is the emergence of 3rd Party platforms that make use of APIs through algorithms, where you share your API keys etc and they automatically trade on your account.
The Algorithm behaves like a proxy fund manager or money manager. They can trade your account whenever they want.
Concern: What if they make big losses and you have no idea of how much they can hurt you?
Concern: Can’t these platforms get a lot of customers and then auto-manipulate a stock, in the name of algo trading?
Concern: APIs + Algorithms could be used to overwhelm/stuff the exchange or be used to manipulate a security’s price. Rate limiting and cool off periods could help address this.
Consultation paper currently bans all APIs and places onus on brokers to regulate them and suggests that brokers take responsibility to run the algorithms on their system
The paper would enable the Broker to empanel someone (and do the checks/risk assessment/quality control) but would prevent an individual from setting up something themselves - but this seems unenforceable.
Stopping APIs altogether is like using a sledgehammer to kill a mosquito. We could achieve many of the objectives by having the algorithm pop up an approve/reject screen that the user has to click on. If you have say more than 50 lakhs or something in your account then you could potentially have fully automatic execution. This would be a useful middle ground to protect the smaller retail customers.
When I click a buy button on Zerodha Kite it triggers an API, when you click a buy button on Smallcase to buy on say zerodha it also triggers a bunch of API, when you place an order through a program that also triggers an API - how do you differentiate between the three? And you can’t build an app without APIs
Even fund managers are found guilty of say front running or offloading - SEBI can come after them since they are regulated. If you’re trading other people’s money and earning from it - you have to be treated with the same level of compliance as a fund manager (PMS/AIF etc)
There aren’t any fund manager rules that allow you to run strategies with the kind of leverage that these algorithms allow you to.
According to Nithin’s twitter space only 0.5% of zerodha users use algos.If you’re running your own algorithm that really should be allowed
Future of fund management (especially at scale) will require some levels of automation and APIs so we can’t take a regressive or overly harsh stand.