FINTECHS such as peer-to-peer (P2P) lenders have burst onto the scene in the past few years to address a credit gap that they say is untouched by banks.
Now, with the ongoing virus outbreak threatening to break small- and medium-sized enterprises (SMEs) struggling with cash flow, supply constraints, and dwindling sales, such newfangled platforms may see their biggest test to date when it comes to their lending models.
Checks by The Business Times showed that P2P platforms have already adapted to the heightened risk environment. On the investors’ front, some investors have diversified by funding more debt backed by property. Platforms have also tightened their credit assessment to account for the heightened risks brought on by the virus outbreak. These go some way to determine if loan delinquency rates will tick higher this year for such platforms.
Keoy Soo Earn, regional managing partner, financial advisory, at Deloitte South-east Asia, pointed out that this “black swan event” will be a check against fintechs’ past credit underwriting policies and the current ability for lenders to recover debts.
“P2P platforms, as a key differentiator to local banks, provide unsecured short-term financing to smaller SMEs that can be approved within a short period of time,” he said. “This leaves the P2P platforms limited options of recovery should a loan turn bad.”
This comes as these smaller SMEs are “likely to face greater financial challenges” in this trying period, he added.
Crowdfunding platforms match lenders in the form of accredited investors to borrowers such as micro-SMEs, with the platforms earning a fee from the matchmaking. Some also now do direct lending.
These platforms are seen as an alternative source of funding for small businesses with a lack of track record. Such loans are typically faster but more expensive compared to traditional banks due to the higher risk.
As it is, the government, banks and the private sector have already pumped in significant funds to help SMEs with working capital.
Co-founder and CEO of Minterest, Charis Liau said that the crowdfunding platform expects greater demand for loans during this period. But the fintech will need to balance this with the investment requirements of their platform lenders.
The platform has since adjusted its credit assessment criteria to account for the higher risk during this period. It will also raise its “post-disbursement engagements” with borrowers.
“We do not anticipate any changes to the terms as they involve independent lenders on the platform,” she added. “However, we will be sympathetic to borrowers who genuinely have suffered disruptions to their operations and will assist borrowers to liaise with platform lenders on restructuring the loans, if required.”
While businesses’ cash flows will be affected due to the virus outbreak, Ms Liau stressed that it is “still too early” to say if the portfolio will see an increase in delinquencies. Its loans overdue by more than 90 days was 1.73 per cent in 2019, up from 0.68 per cent in 2018.
Minterestis also now facilitating a fund by ARA Asset Management, The Straits Trading Company and property tycoon John Lim’s family office to provide loans to SMEs that have been hit by the virus outbreak.
For P2P lender Validus Capital, it expects to see SME loans getting stretched as repayments get prolonged and cash flows become slower. It also finances SMEs directly through an earlier tie-up with Lighthouse Canton Group in 2018 to create a S$20 million fund.
Vikas Nahata, co-founder and executive chairman of Validus Capital, said that it will manage re-payments with a “softer touch”. It has introduced a S$50 million VSupport Package to SMEs who are part of its corporate vendor financing programme. This will help businesses with cash flow issues, operational expenses and support their growth through increased financing limits and longer repayment terms, among other things.
“We faced the trade war crunch last year, and that made us more prepared for this new ‘black swan’ event,” he noted. “Our major changes will be making sure concentration limits are tighter, and growth opportunities still remain available for SMEs that work with large corporates who are partners in our ecosystem.”
Its loans past 90 days due was 2.69 per cent in 2019, up from 2.5 per cent in 2018.
So far, he has not seen any pullback in investments from its accredited investor base.
However, the fintech expects investors to be risk-averse during times like this, and will be less inclined to invest in products that are not insured or ring-fenced in nature. Validus is working on launching a scheme with fixed returns for some accredited investors, added Mr Nahata.
Similarly for Funding Societies, its co-founder and group CEO Kelvin Teo has not seen waning interest from investors on its platform.
However, he said there has been increased diversification into property-backed business loans – from 5 to 20 per cent of monthly investments – as investors manage their risks.
In 2020, he expects delinquency figures to be similar to last year’s or higher, depending on the impact of the virus outbreak and the ongoing trade war. Its loans default rate in 2019 was 2.76 per cent, up from 0.11 per cent in 2018. Funding Societies also has a small direct lending portfolio as well.
The platform has likewise adjusted its credit assessment and monitoring, especially for businesses impacted by the virus outbreak.
For key sectors impacted by Covid-19 and businesses with significant exposure to China, Funding Societies is now “more careful” and will ask for more information to estimate impact. Similarly, when there is a late repayment, it also follows up earlier to ascertain root cause, said Mr Teo.
“As a two-sided marketplace serving both investors and SMEs, unfortunately there is a limit to which we can help these companies, beyond leveraging on our expertise to provide short-term financing for quality SMEs,” he explained.
Even with the added risks on the horizon, fintechs are not necessarily at a disadvantage despite their smaller size. “While fintech players do not have a long history of operations, the short-term nature of our loans enables us to be nimble and adjust quickly to market conditions,” said Mr Teo.
The current uncertainty behind the severity and timeframe of the Covid-19 outbreak means that the dynamic nature of these fintech lenders could also work to their benefit.
Sam Kok Weng, financial services leader at PwC Singapore, said P2P platforms could see new pricing levels due to the higher risk environment.
“At different circumstances, they will just have different risk profiles of borrowers and lenders – it doesn’t mean they go out of business during a crisis.”