A few weeks ago, Validus Capital, an SME lending platform, announced it will be the first platform in Singapore to provide investor protection for their invoice financing loans.
Partnering with insurance provider, EQ Insurance, Validus Capital will join the ranks of China’s Lufax in Asia, which launched in 2011 and is now valued at $18bn.
As investors, the question that we would all have by now would be... "How does insurance work for p2p loans?"
As we've covered in our Beginners Guide to p2p lending, platform operators such as MoolahSense and Funding Societies typically offer double-digit returns to their investors. But the recent news about defaults and MAS regulation updates in the industry have also left investors curious and anxious about the future of p2p lending.
Defaults are inevitable in the lending business. But when deals are uncollateralized, the amount recovered is usually very low.
In other words, if a SME fund seeker needs cash for its business, it would request for the required amount. The SME owner can pledge personal guarantees. But when the business fails, such guarantees are often worthless like in the case of Soilwood and Glen Iris loan defaults.
With Validus offering investor protection insurance with EQ Insurance, this would help investors keep a peace of mind.
How does it work?
We were also curious to know how the insurance protection works for investors on Validus Capital.
To start with, insurance for SME loans is only possible when the risk model is sufficiently robust and gives a good estimate of the probability of default.
Validus uses a rigorous 80-point due diligence and risk assessment process, conducted on the Singaporean loan applicants. This is backed by data from the Credit Research Initiative (CRI), founded by Professor Jin-Chuan Duan at RMI-NUS.
The CRI team provides Validus with a reasonably sophisticated solution in capturing the Probability Default (PD) of SMEs. The CRI is a not-for- profit enterprise, viewing credit ratings as a ‘public good’, challenging to move away from the current ‘for-profit’ model.
The strength of this risk control, with an additional daily credit monitoring report on borrowers, means more visibility and greater investor protection.
Validus Capital provides a select borrowing pool of quality, growth-oriented, SMEs with EQ Insurance providing blanket cover across all invoice financing loans.
Currently, not many crowdfunding platforms offer protection against loan defaults. The few exceptions are: Silver Bullion and Crowdo offering p2p loans backed by precious metals as collaterals. New Union also backs up any financing deal using its own balance sheet.
Where should investors place their trust?
With a growing number of platforms entering the p2p lending space around Asia, it would be a competitive space for these platform operators to gain investor trust.
Some platforms have the brand message that they want to be more transparent of each deals, yet do not disclose critical figures such as loan default rate or non-performing loans.
Trust is something which is built over a very long time. As the crowdfunding industry develops further, investors will demand greater disclosure and better investor protection, in addition to reasonable rates of return.
Validus has come up with a new approach - by developing a rigourous and scientific risk model, it is able to obtain insurance coverage for its loans. Returns are impressive: more than 18% annualized return and zero default rate, although it is still very early days for them.
How will other platforms react? Only time will tell.