P2P lending as an alternative investment for falling FD interest rates29 June, 2020
Bank deposits are the most sought-after traditional forms of passive income in India. Senior citizens in Indian households consider fixed deposits as a main source of income for many years. However, other equity markets have established to have a competitive edge over fixed deposits due to modernization and globalization. Over the years, it has proven as an investment with returns in peanuts. Peer to peer lending is at an early stage in the Indian market and has established a good place for investments. It enables the borrowers to finance their loans directly from individuals. Banks have rigid processing and do not offer loans for smaller amounts. This is where P2P lending comes into play.
1.P2P lending gives higher returns
When it comes to investments, people always look for options that gives them profit. The recent economic changes caused by the widespread Covid-19 pandemic has cut down the interest rates for as low as 3-4%. The Reserve Bank of India announced a cut in the repo rate by 40 basis points (bps). The Central bank has also announced a repo rate cut of 115 basis points (bps) since March 25, 2020. The interest rates are expected to fall further with the fall in benchmark policy rates, affecting the new investors and the investors who have renewals.
"A bank will lend you money only if you can prove that you don't need it." -Bob Hope. The returns received after the tax slab deductions from the fixed deposits are so minuscule to compensate for the inflation in prices in goods. Though fixed deposits are considered as "safe". They are still prone to external factors. Peer to peer lending stands resilient to the changes and the interest rates are as high as 13% to 30%. Bank deposit risks are associated with the fluctuations in bank rates and can decline or increase over time. The risks in P2P lending do not depend on the bank rates but on the portfolio. For example: The interest rates would be higher for a borrower with high risk and lower for a borrower with low risk.
2.P2P lending provides monthly passive income
Now let us face the facts, very often we realize that the amount of time and effort put into 9-5 jobs just doesn't produce enough money. Dread it Run from it. Monthly bills still arrive the same. When seeking a monthly passive income option, P2P lending has a higher hand. Fixed Deposit investors earn their returns quarterly, i.e., once every three months, on the flip side, P2P lending credits the investors every month. In the case of early withdrawals, P2P lending provides an option of selling the portfolio in the secondary market, contrarily fixed deposits charge a penalty.
3.P2P lending provides diversification of portfolio
"Do not commit all to one boat", diversification is the key to mitigate through the risks in investments, unless you are Warren Buffet. P2P lending provides the choice of diversification of portfolios. For example: If an investor has Rs 1 lakh in his account he can choose to diversify the money and give loans as low as Rs 10,000 across different portfolios. The investor can handpick the borrowers and the returns according to their expectations. In a bank deposit, the returns and the portfolio doesn't change according to the investor's expectations. It remains fixed once the investor has committed to a fixed deposit.
The lockdown has made many people realize and revamp the way they think about investing. Fixed Deposits are at a threshold of falling interest rates and has left many investors looking out for non-banking investing options. P2P lending provides high returns with fewer risks. As the CEO of Liberis, Paul Mildenstein said, “This is further evidence that bank funding is losing its significance amongst small businesses as they become more aware of the range of non-bank funding models available to them."