P2P lending platforms see more restructuring, defaults ahead

This article first appeared in The Edge Malaysia Weekly, on April 6, 2020 - April 12, 2020.

Wong Kah Meng

Photo by Haris Hassan/The Edge

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PEER-to-peer (P2P) lending platforms, which have gained in popularity in the last two years as an alternative investment option, are expecting to be adversely affected by the Covid-19 pandemic.

This is because the borrowers are mostly small and medium enterprises (SMEs) and micro SMEs, which use the online platforms to secure loans. However, SMEs have been hit by a double whammy — the pandemic and the Movement Control Order (MCO), which has temporarily halted their operations.

P2P platforms function as matchmakers between borrowers and individuals and companies looking to lend their money with interest. Securities Commission Malaysia data shows that there were 8,102 successful campaigns that raised a total of RM632.38 million as at December 2019.

While P2P platform operators say it is still too early to see defaults happening, as SMEs would typically have one to three months of cash reserves, they acknowledge that there has been an increase in the number of borrowers seeking to defer or reschedule their loan repayments.

“We have not observed any defaults so far but there have been cases of SMEs requesting deferment of repayments. So far, we have had around 10% of issuers/borrowers requesting [a] rescheduling of their repayments,” Wong Kah Meng, co-founder and CEO of Funding Societies, tells The Edge.

He expects the number of requests for rescheduling repayments to continue to rise over the next few weeks, given the reduced business activity experienced by their issuers, especially those operating in industries such as retail, wholesale trading and support services.

AlixCo P2P financing chief operating officer Angelld Quah, who has seen a handful of requests from SMEs regarding the possibility of late payments, concurs.

She says P2P investors should be prudent and spread their risk across many different investment notes at this juncture.

While businesses and individuals with loans from commercial banks have been automatically given a six-month reprieve from instalments, P2P lending platforms say this move cannot be applied to them.

Fundaztic chairman Jeffrey Chew says, “P2P lending is an investment instrument. So, fundamentally, it is a very different product from a loan you get from the bank. There is no way any platform should tell its investors to give a six-month automatic moratorium to the issuers because that would be six months of interest forgone for the investor.”

Like Funding Societies and AlixCo, Fundaztic is providing a rescheduling of payments on a case-by-case basis. Chew notes that some 15% of its issuers have asked for repayment rescheduling after Bank Negara Malaysia announced the moratorium period for individual and business loans. He estimates that of the 15%, 7% to 8% of them may need some leeway on repayments.

“We have quite a number of issuers who are providing non-essential services or goods. So, with a one-month MCO, it would mean zero income for them. Half of these issuers will struggle with repayments. So, in terms of potential defaults, if no restructuring help is provided, it would probably be by the 7% to 8% of issuers,” he says.

Currently, Fundaztic’s default rate stands at around 10%. It has a total disbursement of RM80 million so far.

Many businesses are concerned about a further extension of the MCO to rein in the spread of the virus. Italy, for example, has been on lockdown since early March and, according to news sources, recently extended it to April 12.

P2P lending platforms expect the delinquency rate among its issuers to rise further if the MCO is extended.

“If the MCO is extended for two more weeks, we can expect to see another 4% to 5% of defaults happening,” says Chew.

AlixCo’s Quah says many SMEs will struggle to survive after two months if they do not receive additional support.

Funding Societies’ Wong believes that while there will be an increase in delinquencies and defaults if the MCO is extended, it is still too early to gauge the impact, as much of it would depend on how the economy fares post-MCO, given the disruption it would cause to business activities, supply chains and collection cycles.

While potential delinquencies could be on the rise, investors have remained fairly cool-headed about the situation. Unlike the predicament that the P2P lending industry in the UK is facing, the local industry has been spared the exodus of funds at this juncture. In the UK, investors have been rushing to withdraw their funds for fear of defaults among issuers.

Quah notes that, surprisingly, withdrawal requests on AlixCo have been limited.

“The overall withdrawal percentage is only slightly higher than before the crisis. However, investors are more cautious when it comes to larger P2P investments these days,” she says.

While the near term looks challenging for P2P financing, industry players believe it is one segment that will continue to grow after the downturn.

Chew believes there will be a slowdown in terms of new investments, but he expects P2P financing to pick up at year-end or early next year.

Wong says that despite the current predicament and its negative impact on businesses across most industries, there are still growth opportunities for the P2P financing industry. They can be found among SMEs in the defensive and counter-cyclical industries, which are expected to thrive in the current macroeconomic environment.

He adds that P2P financing could become more appealing to investors, given the low interest rate environment and stock market rout, which offer limited alternative investment opportunities.

Both Chew and Wong believe the MCO and Covid-19 pandemic will help spur the next wave of digitalisation of businesses, which will benefit the P2P financing industry in the medium to long term.

“If you ask me, I’m more positive about digital financing now compared with a year ago,” says Chew.

 

 

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