What do you think will happen to all the P2P lending companies in Singapore in the event of a recession, will they all start to default? Should I pull out my investments now? - Seedly
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Anonymous

Asked on 27 Feb 2020

What do you think will happen to all the P2P lending companies in Singapore in the event of a recession, will they all start to default? Should I pull out my investments now?

Wondering what the community thinks as they have not actually been through a recession yet, most started in 2010s...

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Kenneth Lou
Kenneth Lou, Co-founder at Seedly
Level 9. God of Wisdom
Updated on 13 Mar 2020

I actually just got this email from Funding Societies... Replicated in full~!

Dear Kenneth,

We have been monitoring the escalation of the COVID-19 virus since January 2020. Upon its emergence in Wuhan, China, the virus has impacted many associated supply chains and has increased business volatility and risk. Our growth strategy is pivoted on SMEs and their linkages - upstream with their suppliers and downstream with their clients. Through this ongoing outbreak of the COVID-19, we have implemented the following measures to monitor and manage risks to our portfolio during this time.

Credit Assessment Approach: We expect non-performing loans (NPLs) of SME-focused lenders to come under more pressure, especially due to possible increased defaults by SMEs operating in F&B, travel, cross-border trade, and service industries that are dependent on labour from affected countries in Southeast Asia. As originators, we have taken the following preventive measures:

  1. Assess existing borrowers’ degree of dependency of revenue and/or other linkages on affected countries. We are also taking a reduced exposure of credit limit granted to SMEs. This is being viewed on a case by case basis.

  2. Forecast of issuer’s revenue/cash flow for assessment of all new loan submissions and renewals are subjected to a haircut due to a weaker economic outlook.

  3. Be agile in reacting to changes in the macro economic environment to tighten the ratios and reduce loan limits and tenor, and increase rates to adjust for increase in risk

Short Term Loans: We have started further reducing the average loan tenor on a portfolio basis to mitigate mid to long term risks. For example, issuers that were previously eligible for a 12-month tenor would be provided a shorter term loan, while we assess their debt servicing capability. This allows us to rebalance our portfolio at more frequent intervals and be better placed during the indefinite duration of COVID-19 and its impact on global markets.

Closely Work with Borrowers who have Large Exposures: We recognise that SMEs who have borrowed larger quantum are especially vulnerable due to their high credit exposure. In order to mitigate and control the concentration risk across your portfolio, we will either reduce limits or restructure facilities on our borrowers’ loans, on a case by case basis.

Credit Monitoring and Remedial Management: We continue to monitor the performance of our portfolio and its underlying risks very closely. On top of existing risk management activities, our collections team has:

  1. Inherited recovery efforts from relationship managers (who are normally the first point of collections) instead of stepping in only after 1 month. This will help us to determine early on if borrowers require a restructure in their repayment plan in order to fulfill their obligations to the platform investors

  2. Been instructed to proactively restructure loans where we see early warning signs.

We will continue to carefully manage our key indicators and evolve our risk management capabilities depending on the global economic situation. On top of this, Funding Societies’ employees have been split into 2 teams to work from home and at the office, on a weekly rotational basis. All employees also go through temperature checks before entering the office premises. We are committed to ensuring our employees are healthy so that our business remains of service to you through this period of volatility. If you have any questions, please contact us at [email protected] to receive updates.

Best regards,

Team Funding Societies​​​

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Nathaniel
Level 4. Prodigy
Updated on 18 Mar 2020

It depends on the exact marketplace lending platform. Some platforms have much stricter borrowing requirements, will perform more thorough financial checks, and may even have trade credit insurance in place to protect their lenders and themselves. See here for an overview of P2P default rates: https://blog.seedly.sg/p2p-comparison/

You should look at the companies you've lent to via these platforms, and assess their financial strength. Look at liquidity ratios, debt ratios, interest coverage ratios (if such information is accessible to you). If sales dropped by x% due to a recession, how would that impact the company's ability to repay debt? How much would sales have to drop before your analysis tells you the company would go into default? See here for a guide on credit analysis: https://corporatefinanceinstitute.com/resources/knowledge/credit/credit-analysis/ If your portfolio is made up mostly of high-risk borrowers then you should re-assess whether the macro environment in the next 12-24 months is going to treat these risky borrowers well, or not.​​​

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Z. Hao
Z. Hao
Level 3. Wonderkid
Answered on 29 Feb 2020

Your capital would be hardly affected even if the P2P companies default, it is because your uninvested capital will be placed in a trust that cannot be used by the P2P companies themselves. Your investment portfolio however, might take a hit if the SMEs start to default, as they are often at the bottom of the foodchain. It will not take much for the subprime borrowers to fail.

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UPDATED:

There is no records in Singapore. However the first p2p lending platform can be found in UK, zopa, in 2005. It survived the global recession. The idea of p2p lending proliferate in the west after global financial crisis because of the distrust in banks.

As for Singapore, there is no records on how they pull through. Certainly, I feel that it is interesting how they handle the situation. Will all loans default? Not all. Chance of recovery, certainly will.

There are currently a few companies filing for moratorium for debt. Banks included. Bonds maybe.

If u have better alternatives, it will also be wise to go for a better choice than p2p lending

Edited:

I happened to come across this article.

It will be useful to see how P2P lending platforms are dealing with the current situations

Probably, it will shed some lights and be better informed

https://www.businesstimes.com.sg/banking-finance/p2p-lenders-face-big-test-amid-virus-outbreak ​​​

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Alex Chua
Alex Chua

02 Mar 2020

Fb pm me if u have any questions or some research details

Can you pull it out if you’re already invested?

But yes, expect default rates to increase. Several companies are filing moratoriums for debt.

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