This article first appeared in Personal Wealth, The Edge Malaysia Weekly on April 6, 2020 - April 12, 2020
Most of the peer-to-peer (P2P) financing platform operators in Malaysia were already prepared for a slowing economy before the outbreak of Covid-19, having observed signs that a slowdown could occur since the middle of last year.
These platforms have made the effort to help their small and medium enterprise (SME) issuers and investors by applying a more stringent credit approval process and restructuring repayments, among others.
While it is still too early to forecast what the real impact of Covid-19 will be on the issuers, the platform operators say it is possible that investors will see a higher default rate and lower returns from their investments in the months ahead. But they still believe investors will be able to get mid to high single-digit returns.
Although unfavourable market conditions have severely affected businesses worldwide, local SMEs are only starting to feel the impact, says Kristine Ng, CEO of Peoplender Sdn Bhd (which operates P2P platform Fundaztic). Given the uncertainties facing SMEs in the coming weeks, it is difficult to determine just how much of their business will be impacted, she points out.
“For now, payments are still coming forth and we even saw an improvement in the quality of loans from late January to end-February. I think we will only see the situation visibly worsen in early April,” says Ng.
“There will definitely be a drop in the SMEs’ revenue and cash flow, which will translate into an inability to make payments in the future. Most SMEs typically have cash flows that can sustain them up to three months. So, we expect to see non-performing loans grow by then.”
Since the implementation of the Movement Control Order (MCO) on March 18, there has been a growing number of SMEs requesting some form of assistance to defer their payments, says Wong Kah Meng, CEO of Modalku Ventures Sdn Bhd (which operates P2P platform Funding Societies). Up to 10% of the platform’s issuers have requested to reschedule their payments to date.
“In such a scenario, the issuers will still pay the interest to investors. But we will allow them to defer the payment of the principal, which is the bigger chunk, for three months. With the current situation escalating, we expect the number of requests to rise over the next few weeks, in line with the reduced business activity by some of our issuers, particularly those in affected industries such as physical retail, wholesale trading and support services.
“Understanding this challenge and having factored in other uncertainties that may arise, we have provided and will continue to provide deferment programmes to qualified SMEs as a means of assisting them in these trying times. We have also actively engaged with the Securities Commission Malaysia to identify opportunities to support SMEs and investors,” says Wong.
On March 25, Bank Negara Malaysia announced a six-month moratorium on loan payments and a restructuring of outstanding credit card balances. Ng says Fundaztic received a lot of queries from its issuers following this announcement as to whether something similar could be introduced on the platform.
While a blanket moratorium is not possible due to the platform’s contractual obligation to its investors, an early restructuring [of the payment plan] can be negotiated, she points out. “Typically, this is only done for defaults. Now, we are offering it to SMEs that may be facing difficulties in paying back.
“If necessary, we will introduce something that has a moratorium element, allowing certain issuers to defer payments for a few months. But we will be very careful about introducing this because we want to strike a good balance between the needs of issuers and investors. We do not want any of the measures we introduce to impact any party too negatively.”
As at March 25, Fundaztic’s annualised default rate stood at 3.44%. Due to the heightened uncertainty, it will be difficult to gauge the actual impact of the gloomy economic landscape on the platform’s future default rate, says Ng.
“Having said that, we have always performed stress testing. We have found that [investors] who have been with us long enough and have a diversified portfolio will still make a decent profit even if we stress the portfolios by three times [our default rate, for example], at a default rate of about 11%. However, the results will be different if they have invested in more recent notes that may default, resulting in very few receivables that will not be able to cover the overall portfolio,” she adds.
The default rates in the industry could possibly increase in the coming months, depending on how well businesses cope with the repercussions of the MCO, says Wong. Funding Societies’ default rate stood at 3% as at March 27.
The platform is shifting its focus to its invoice financing product, given the shorter tenure and relatively lower risk. The product is aimed at financing completed business transactions, which is a safer investment option in the current situation.
Funding Societies is also stepping up its monitoring of payments from SMEs affected by the slowdown. “Where justified, we will facilitate a [new] payment plan based on their latest financial position to help ease their financial burden. In doing so, we are also protecting the interest of investors from delinquencies, an action that is consistent with some of the actions undertaken by major financial institutions locally to help tide SMEs over in these difficult times,” says Wong.
Looking at the current situation, Ng expects a major slowdown in the hosting of new issuances on Fundaztic until there is an improvement in investor confidence and their ability to invest. “One very important thing for us to do now is to maintain the quality as much as possible so that investors’ trust remains intact during this difficult time. If investors see that we are still able to host quality issuances in trying times, they will put in more in better times,” she says.
Chua Chin Hang, chief technology officer at B2B Finpal, says the platform has tightened its approval process for new issuances, only allowing issuers with viable and sustainable business models to be onboarded. The platform is also selective when it comes to the sectors the issuers are in. “From mid-2019 onwards, we have tightened our credit approval process and rejected quite a number of applicants, especially those from high-risk sectors such as oil and gas, garment manufacturing, construction and those related to mining.”
While the number of issuances will not be affected, investors may see a drop in higher-grade notes. “It is now harder for issuers to obtain an A-grade. So, the notes may be mainly B or C-grade. The lower the grade, the higher the risk. Hence, the returns could also be higher,” says Chua.
B2B Finpal is working on a capital protection plan for investors to recover a major portion of their capital in the event of defaults. More details of this plan can be anticipated in the second half of the year.
Stay invested
Fundaztic’s Ng says investors should not make any knee-jerk reactions and stay invested whenever possible. “We would apply the same wisdom to investors of traditional asset classes. If they still have money to grow their wealth, they should not pull out of their P2P investments. They need to build a portfolio of notes and diversify to minimise their risk. That is why the minimum investment amount is as little as RM50. It allows people with RM1,000 in capital to invest in at least 20 notes.”
Investors should be prudent and have a better understanding of the investments they are making, as P2P platforms typically present as much data as possible on the issuers to help investors make an informed decision, says Chua. There is still an opportunity for investors to earn above average returns compared with what they can make from other asset classes, he adds.
“Some investors have chosen to take profit during this period and stay put to protect their capital. For these investors, B2B Finpal will provide interest on their unutilised funds, like a conventional savings account. When an attractive deal pops up, making an investment is just a few clicks away as long as they have money in their accounts,” says Chua.
He says the platform’s investors could expect high single-digit returns, given that the majority of its existing issuers are from the fast-moving consumer goods industry. “Based on the analysis of our parent company [B2B Commerce Sdn Bhd], we have noticed that these companies are not as badly affected as others. In fact, some of them have been targeting the mid to low-end market and have been showing healthy growth, with consumers spending more prudently.”
Given the current economic climate and an expected increase in default rates across the banking industry, Wong expects investors to see mid-single-digit returns, in line with the lower interest rate environment. “Previously, investors could get returns of high single digits to low double digits. This year, we expect them to get returns of mid to high single digits because of the potentially higher defaults, which is also seen across the banking sector,” he says.
That means the platform still expects P2P returns to exceed those of fixed deposits (FDs). FD rates in the country have fallen due to the overnight policy rate (OPR) cuts in January and March. The OPR is currently at 2.5%.
Ng says that even in the worst-case scenario, properly diversified investors should get returns that are double what they can get from FDs. “However, right now, our role is to make sure that investors are at least breaking even because we are still the only P2P platform to introduce Principal Protect.
“We guarantee those who meet the conditions for the feature that their principal remains intact. No matter what, this element will be there, so we have all the interest in the world to make sure that our investors make a profit.”
The two conditions for Principal Protect is that investors must build a portfolio of at least 100 notes within 12 months and the highest invested amount in the portfolio must not exceed three times the average investment amount per note.
Ng says she also needs to manage the needs of the SMEs. “If we do not help them to restructure their payments, they will end up being dissolved in a matter of two months. So, it is better to be realistic about it and work on a restructuring plan so that they can continue to survive.
“Investors may receive less in the interim, but I hope they understand that it is a necessary move. We cannot expect things to be the same in good times and bad. Certain things have to be done differently to manage the needs of both investors and issuers.”
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