DESPITE the onslaught of the Covid-19 pandemic, some peer-to-peer (P2P) lending platforms have been able to ensure their asset quality remains sound.
Major players such as Funding Societies Malaysia and Fundaztic tell StarBizWeek their risk management strategies have proved effective in helping to keep the default rates of their funds stable at a time when so many businesses are struggling.
At Funding Societies Malaysia, for instance, its co-founder and CEO Wong Kah Meng reveals, the group’s default rate has remained relatively stable throughout the Covid-19 pandemic at about 3% for the domestic market and 1.3% regionally. He attributes this to the group’s robust underwriting models.
“To support small and medium enterprises (SMEs) during this challenging period, we have introduced a deferment programme between early and mid-2020 to help them recover their cashflows, and hence continue making their repayments on time thereafter, ” Wong says.
“Thus, only 3% of our notes, which previously went under the deferment programme (which has now ended), turned delinquent or defaulted, ” he explains.
As for Fundaztic, its CEO Calvin Foo reveals, default rates currently average at 2.5% per annum.
It is understood that default rates in the industry can go up to as high as 10%, as borrowers tend to be startups or small businesses that are not well established.
Foo concedes that the operating environment had been challenging due to the Covid-19 pandemic.
Hence, the group has introduced some relief measures to help its clients so as to ensure timely repayment of their loans to the company.
To manage risks during the virus onslaught last year, Foo says, Fundaztic approved fewer loans to SMEs as well as reduced approved loan limits. The more stringent measures resulted in the group’s average disbursement amount per SME to fall to RM40,000 from the previous average of RM70,000-RM80,000.
In addition, Fundaztic has offered the “Restructuring and Rescheduling” (R&R) services in the second and third quarters of 2020 for the SMEs that were impacted by the pandemic and the movement control order (MCO).
“I believe the R&R relief was crucial in allowing these SMEs to manage their cashflow during these tough times and fortunately, we did not see any spike in our default rates throughout the year. In fact, our default rate decreased to below 2.5% per annum, ” Foo explains.
While P2P funds are quite high-risk investment, interest in such assets appears to have increased in the country in recent years.
Even though there had been fears of a potential spike in default rates during this period of economic hardship, both Funding Societies and Fundaztic say they have seen a growth in their investor base, and this has enabled their platforms to provide timely financing to SMEs over the last one year.
This growth is driven by investors seeking alternative investments that could offer higher returns vis-à-vis fixed-deposit savings.
“We have started to see growing investor interest recently. The low fixed-deposit rates provided by banks is one of the reasons driving investors to look for alternatives that can offer them better returns, ” Foo says.
“In addition, this pandemic is accelerating the use of digital space, hence increasing the awareness and adoption of P2P, which is a digital platform, in the country, ” he says.
Echoing the sentiment, Wong points out that P2P investments have been able to deliver stable returns for investors amid the pandemic.
He notes that P2P investments are also attractive to many due to their short investment tenures of up to 18 months, which means relatively good liquidity; as well as the product’s uncorrelated returns with traditional asset classes, which provide diversification benefit to investors and help them cushion their portfolio against increased market volatility.
“The move towards digitalisation has also been evident among investors during the pandemic and we believe that this will bode well for a digital investment platform such as ours, ” Wong adds.
In general, the rates of return from P2P investments vary according to the risks attached to the specific products.
Foo reveals that most products at Fundaztic are yielding between 10% and 12% per annum net of fees and defaults for investors.
“Of course, due to the pandemic, there are other P2P platforms that provide lower risk products that offer between 6% and 8% returns, ” he says.
“With 11 regulated P2P operators in the market now, I’m sure there are different P2P investment products available to fit every type of investor’s risk appetite, ” he adds.
Funding Societies’ Wong says the group’s robust risk management has enabled its products to deliver returns ranging from mid to high single digits to investors, despite the onslaught of the pandemic.
“In order to mitigate the effects of the evolving economic climate, we have been continuously reviewing and updating our underwriting and credit policy, as we find the balance between serving SMEs and protecting our investors’ best interests, ” Wong stresses.
Despite the economic uncertainty, Wong is optimistic that the accelerated shift towards digitalisation will continue to enhance the appeal of digital financing such as P2P.
Amid the Covid-19 pandemic, Funding Societies has found opportunity to reach out to more impacted micro, small and medium enterprises (MSMEs), as these organisations become more receptive to digital financing platforms.
In addition, SMEs are now turning to digital financing platforms as more traditional financial avenues tighten their credit lines due to economic uncertainty.
On that note, Wong says, Funding Societies is optimistic of achieving its target of RM1bil disbursement this year, as more SMEs gravitate towards digital channels, including digital financing.
Nevertheless, the group will continue to take a prudent approach to ensure delinquencies and defaults remain stable and well-managed.
Wong remains cautiously optimistic on the prospects of the P2P industry in the first half of this year, with growth expected to be supported by the national vaccination programme.
“We foresee further growth for the second half of 2021, as the economy stabilises further, along with the adoption of digital financing channels, in line with the SMEs’ digital adoption, ” he says.
Versatile and transparent
According to Fundaztic’s Foo, the P2P industry will shape the digital financing landscape in Malaysia, and will complement the digital banking sector.
“With Bank Negara issuing digital banking licences in the first quarter of next year, the P2P industry is ready to complement these ‘DigiBanks’ and further close the gap for funding for underserved SMEs in the country, ” Foo says.
He notes that with an additional RM150mil allocated under the SME Digitalisation and Automation Grant Scheme and an additional RM50mil allocated for the P2P industry under the Malaysian Co-Investment Fund (MyCIF) in Budget 2021, the outlook for P2P looks bright as more underserved SMEs embraces automation and digitalisation in their operations.
“These initiatives will also educate and allow SMEs to be comfortable in applying for financing products through the Internet, ” he adds.
As Fundaztic deals mainly with small, micro businesses and retail investors, Foo notes that the group has learnt the importance of being versatile and flexible when faced with challenges.
In addition, he says, being transparent and quick to respond to retail investors is key to maintaining confidence in the platform, especially when there are concerns of a possible increase in defaults due to the pandemic.