PEER-to-peer (P2P) lending has seen robust growth over the last three years as businesses turn to these platforms as an alternative means to raise funds for working capital.
But as cashflow becomes tight and companies begin to see substantial declines in revenue during the period of the Covid-19 pandemic, many may find it a challenge to meet their loan obligations to lenders on these platforms.
Prior to the Covid-19 outbreak, Funding Societies Malaysia co-founder and chief executive officer Wong Kah Meng says there were already signs of a slowing economy and there was a general lengthening of payment terms across industries.
SMEs were also noticeably withholding expansion plans given the economic uncertainty driven by the US-China trade war and disruptions to global supply chains.
While there have yet to be any defaults due to the implementation of the Movement Control Order (MCO), Wong says there have been cases of SMEs requesting for deferment of repayments.
“Approximately 10% of our SMEs have requested for rescheduling of their repayments, generally amongst micro and small SMEs who typically have lower cash buffers to weather the economic downturns.
“In terms of the affected industries, we foresee sectors such as offline-focused retailers, wholesale traders and manufacturers involved in imports and exports, construction of new projects, tourism and hospitality to be most impacted by the MCO and the corresponding economic slowdown, ” he says.
But at this point, the full impact of the pandemic has yet to be felt.
Peoplender Sdn Bhd chief executive officer Kristine Ng thinks there would likely be an increase in delay of repayments – or even defaults – judging from the requests made even by prompt paying borrowers to defer repayments.
Peoplender operates the Fundaztic platform.
So far, about 10% of Fundaztic’s close to 1,000 active issuers have written in to request for a moratorium or deferment of monthly repayments.
“We have not noticed any significant increase (in defaults) thus far. In fact, the increase of defaults was improving prior to this. There was a slower increase from December 2019 to February 2020.
“However, this is because the impact of the Covid-19 is likely only going to be felt from April onwards, ” says Ng.
According to its website, the default rate on Fundaztic’s platform since it started is 9.99%. The 12-months default rate stands at 3.70%.
Ng notes that the majority of these come from the non-essential businesses such as wholesale, retail and services.
About 80% of the SMEs funded on the platform so far are from the non-essential industries.
“The average funding size of Fundaztic is rather small as compared to other players in the market.
“The average funding is just RM65,000 per note and in terms of defaulted notes, the average defaulted amount is around RM55,000 with the largest defaulted amount being RM155,000.
“As much as I want to remain confident, I can’t and, I have to say that we will definitely be expecting more late payments and defaults as well as write-offs.
“I can only assure investors that we will do our utmost best on what is permissible contractually to protect their interest whilst balancing the needs of the SMEs as well, ” she shares.
Funding Societies says its default rate has maintained at 2% in 2019.
As business comes to a halt during the MCO, one of the biggest challenges for companies is maintaining their cashflow.
In a recent survey carried out by the SME Association of Malaysia and Bizsphere, it is found that nearly one third or 33.3% of SMEs only had enough cashflow for the month of March, while 37.8% can only sustain up till April.
The survey covered some 15,600 respondents.
To this end, the move by Bank Negara to allow a six-month loan repayment moratorium is very much a welcomed reprieve. This will at the very least momentarily allow a “breather” for the SMEs in terms of building up and managing their cashflows.
But unlike banks, Ng says the platform’s contractual obligations do not permit it to perform a blanket moratorium for all its borrowers.
“Therefore, what we have done is to allow for early restructuring and deferment of payments on a case-by-case evaluation basis.
“Fundaztic does not impose additional interests on the SMEs as part of its restructuring exercise. I believe this is a major difference with financial institutions and a fair practice of understanding the difficulties that the SMEs are facing whilst also looking at the right level of investor protection, ” she says.
Wong adds that a rescheduling of repayments will be a win-win solution for the SMEs and investors as this will provide an opportunity for SMEs to recover and eventually continue to meet their outstanding repayment obligations to investors.
Funding Societies has, likewise, taken measures to curb possible defaults.
“We have been reaching out to our SMEs proactively, even prior to the MCO, to understand how their business has been impacted in the current circumstances and implications on their repayment capability in the near term.
“We have then offered restructuring and rescheduling options to impacted SMEs to assist them during this challenging period, ” he explains.
Given the sudden and wide-reaching implications of the MCO on the economic activity of the country, Wong sees a need for the government to help SMEs to meet their financial obligations during these times of inactivity or reduced activity.
He adds that the P2P financing platforms would be an effective channel for the government to extend financing to micro and small SMEs, similar to the MyCIF programme, given their focus on the underbanked SMEs.
Keeping a balance
At the start of 2020, Funding Societies had projected that total financing for the P2P industry would hit RM1bil this year following a strong showing in 2019. Last year, Malaysia’s P2P financing increased to RM521mil.
Given the current circumstances, the industry is sure to take a hit as investors remain cautious about funding businesses in the face of market uncertainty.
“As we speak, we are noticing a much slower take-up rate for Notes that are of higher risks. It is totally understandable and normal for any investor’s confidence to be shaken over such unprecedented times.
“We would likely be experiencing lower investment activities and an increase in withdrawals of available funds received from repayments, ” says Ng.
That said, she emphasises that the role of P2P as an alternative funding source for businesses has become more apparent and important in these times.
“I wish to draw back to the fundamental principle of P2P financing or crowdfunding and that is to connect people with resources to help those needing resources while earning some returns in between. I hope that investors will stay invested through this difficult period because it is precisely the time that their resources are needed the most, ” she says.
Certainly, platforms will have their work cut out to keep a balance between meeting SMEs’ need for financing and protecting investors’ interest.
Ng says Fundaztic will need to perform its usual due diligence with even greater intensity and care to ensure that the quality of the notes do not deteriorate beyond what the general market is experiencing to maintain investors’ confidence and trust.
At the same time, she urges SMEs to honor their obligations to repay the loans.
“If they are not able to repay in full, they should negotiate a fair sum with the platform so that we can retain investors’ confidence and therefore, allow the platform to continuously help other SMEs obtain funding.
“All parties need to stay on the same boat and paddle together to avoid a possible sinking, ” she adds.
The platform is also exercising additional measures to understand the purpose of funding for companies and to assess their ability to repay before granting them the right funding amount.
It will also use performance data to perform a re-pricing of interest rates going forward so that it would better reflect perceived risks given its risk-based interest rates strategy.
“We have been pricing the interest rates based on default rates of 5%-8% per annum for investors to still earn decent returns for taking the risks of helping SMEs grow. Therefore, investors who have built a diversified portfolio of at least 100 notes would likely be able to still remain resilient should the defaults double.
“However, no one can accurately predict the impact going forward especially on the pandemic as it involves so many countries, ” says Ng.
For Funding Societies, Wong says the platform is also identifying SMEs with growth opportunities, particularly those within defensive and counter-cyclical industries.
“To protect investors, we have been reviewing our exposures to SMEs based on the latest situation and also focusing on accounts receivable financing for SMEs which are shorter-tenured and safer.
“Likewise, we have seen our investors taking on a more risk averse position and pivoting to these investment products.
“By implementing these measures, along with close monitoring of the situation, we are protecting not only our investors’ interests, but also ensuring that we are there to lend a helping hand to SMEs in times of need, ” says Wong.
While this episode is expected to have a negative impact on businesses across most industries in the short term, especially those that operate predominantly offline or rely on physical reach, Wong says there are still growth opportunities for the P2P financing industry to better serve SMEs within the defensive and counter-cyclical industries, which will thrive in the current macroeconomic environment.
The key, really, is to maintain and retain investor confidence as much as possible to tide through this uncertain period.