Most investors enjoy being part of the investment “flavour of the season”. A few years ago, real estate had been a rising “flavour”. In fact, it was so popular that in May 2013, Singapore’s Property Price Index (PPI) peaked at one of Singapore’s all-time high at 175.1 (compared with March 2016’s PPI at 140.6). One can easily recall that back in the day, property launches have always received overwhelming responses. Even property investment educators were having their classes packed to the brim; so much so that one in particular had to rent a big hall at the Singapore Expo just to conduct their classes!
But these days, with the government curbs on property investments and recent bearish outlook on the stock market, many investors have taken a backseat on most mainstream investment assets. Yet, this does not mean a slow market for asset placements as majority of investors have always been on the look out for the next investment “flavour of the season”.
“Come invest your money by lending to SMEs at an interest rate of 15.5% per annum!” – Touts a headline from an advertisement from a debt-based crowdfinancing platform.
Some have even went further by reassuring a 0% default rate on their platform since inception.
Is it all just hype?
With fintech growing to be one of the top emerging trends, many have swayed to the perception that p2p lending and crowdfunding platforms are bound to disrupt the banking industry. While such comments carry some truth, we must remain mindful that banks have been around for centuries. People have previously predicted the death knell of banks as early as 40 years ago when phone banking first rose to popularity decades ago and many thought telecommunication organizations would be take over the role of banks. Similar fears came along in the early 2000s as well, when the trend of internet banking emerged. Both predictions turned out to be wrong. Banks eventually innovated and adapted to the trends, from phone banking to capital markets development.
In addition, the credit evaluation processes of banks have always been evolving and adapting to the market’s condition. Businesses that used to be credit worthy five to eight years ago can now be deemed as high risk to the banks.
As a result, some of these businesses that were not successful in their fund seeking process through the banks have sought out to crowdfinancing platforms. These platforms would then do their own credit assessment, and proceed to put up the deal onto their website for investors to subscribe.
All that Glitter Isn’t Gold
Business Times reported on their frontpage on 9 March 2016 that it was only a matter of time before platforms would see their first default. True enough, in April, the Straits Times reported that the Korean travel agency, S Travel had gone bust, leaving their investors (lenders on the crowdfunding platforms) in the dark.
Similarly, just last week on June 18, Straits Times reported that another crowdfunding scheme had gone sour. This time, it was Glen Iris, a security services firm which defaulted more than $400,000 on their loan to investors.
An analyst from Let’s Crowd Smarter who also invested into the S Travel deal reflected on the story behind the default. It is suspected that the company had taken on too much debt while business was declining. A quick glance on the firm’s balance sheet shows that while the debt level were not excessive, it had to repay a bulk of its liabilities in less than 12 months given the loan tenures were of shorter term. In addition, the company’s directors had insufficient assets to satisfy creditors.
With all that in mind, it was clear that deals like those of S Travel were on the riskier side.
It would also be understandable why the traditional financing institutions would not approve S Travel’s fund seeking application if they had decide to go from that route.
Banks have come a long way when it comes to dealing with loans. Lending involves not only matching investors and borrowers. There is a great deal of work involving monitoring risks, collaterals when needed, restructuring the deals with fund seekers.
While it will be up to every investor to get themselves educated on credit assessment, it would also be crucial for them to get access to similar information that banks require of every fund seeker. Fact sheets provided by crowdfunding platforms must not only include their financial information, but also other key data such as bank account statements, debtors and creditors aging report and existing borrowing facilities.
Just like the Singapore Stock Exchange has maintained a good level of transparency of listed companies and its directors, public policy should also be ensuring that crowdfinancing platforms here should provide a minimum benchmark of transparency so that investors can make sound decisions before financing the fund seeker.
(This is a re-post of an article that Let’s Crowd Smarter wrote to Business Times several weeks ago.)
After we posted this article, a reader informed us that S-Travels also took bank loans. So it is a bankable company that unfortunately collapsed under certain market conditions. Okay, fair point. What we are trying to say here is that a bank has plenty of information (bank accounts statements, financial statements, etc) to make a decision whether or not to lend. But the p2p investor would not have access to those information; hence they will always be reliant to a certain degree on the ability of the p2p platform to vet the loans. Also, to make an informed decision, certain financial information should also be disclosed.