The Business Times Feature – P2P Lending: A case for borrowing to grow

SMALL and medium-sized enterprises (SMEs) are important to the economy. In Singapore, SMEs account for 69 per cent of employment and 49 per cent of the economy. Banks and bigger financial lenders became more conservative in lending in the aftermath of the 2008-9 global financial crisis. SMEs do not have the capitalisation size to list on stock exchanges. Plus, they do not have the scale of rapid growth to pique the interest of venture capitalists. They often turn to overdraft facilities to finance medium and longer- term operations, which is not ideal.

That is where peer-to-peer (P2P) lending solutions, like crowd-funded borrowing, offer SMEs access to the necessary finance to grow their businesses even in times like these. However, the take-up rate for such facilities are still slow, although capitalisation is aplenty despite the downturn. We often see that the more traditionally-minded businesses in Singapore and Asia are generally very cautious about borrowing to grow. Perhaps this stems from a cultural stigma of being indebted, just like how it took some time for the idea of using credit cards to gain widespread acceptance in Asia some generations ago.

Of late, such claims of cultural stigma do not bare scrutiny. The idea of crowdfunding borrowing is gaining more traction in Southeast Asia. Even though the industry in this region is not yet as large or developed as that in the US due to the latter’s head-start, it is gaining more traction over the last five years. P2P lending in markets like Indonesia, for instance, has seen a growth from US$20 million in 2016 to US$ 1.4 billion in 2018.

Resalpha, the franchisee of Killiney Exchange, raised S$160,000 through the crowdfunding platform SeedIn in 2019 to fund growth. The campaign was successfully backed by 110 SeedIn members. Besides a flagship store at OCBC Centre in Singapore, Resalpha has since brought the heritage local brand Killiney to Phnom Penh, Cambodia, and is in the process of setting up their second outlet there. These moves have further solidified Resalpha’s (franchisee of Killiney Exchange) reputation as a homegrown brand growing from strength to strength.

While there are risks – real and perceived to borrowing from P2P lenders to grow – and there are increasing opportunities to obtain capital from nontraditional sources, this industry is heavily regulated by authorities in Singapore as well as the lenders themselves. Crowdfunding in Singapore is regulated by the Monetary Authority of Singapore (MAS) under the Securities and Futures Act and the Financial Advisers Act.

An operator of a P2P platform is required to hold a capital markets services (CMS) licence, as do credit rating agencies, fund managers and real estate investment trust (REIT) managers. To regulate any breaches, the MAS may require the licence holder to perform an audit, or the licence may be revoked. Adding to that, P2P platform operators, also have their own risk assessment tools to perform a “health check” on their borrowers.

For instance, SeedIn applies a Digital Credit Scoring System in accordance with their credit philosophy to rigorously assess the credit worthiness of a borrower. Through the application of algorithms that help with the “heavy lifting”, this strategy simultaneously enables a business’s fundability to be analysed with precision while reducing the chance of human errors throughout the process. This improved efficiency also enables the platform to assess more loan requests from borrowers.

This is a weighted scoring scheme based on the criteria of “due diligence” (which looks at whether the borrower has any litigation suits against it or has existing charges from other financiers), “repayment ability” (to be determined through bank statements and upcoming projections from the borrower) and “collections” (which looks at the profile of the guarantor for the loan, and their credit history).

In a bid through coordinated and catalysed actions to support the common interests of the industry, the company also launched a Payment Rating System to assess borrowers’ repayments. The system assigns a grading to the borrower based on the timeliness of their repayment history, the details of which can be purchased by institutions and companies. A negative rating would affect the borrower’s ability to secure such loans in future. Detecting the early signs of financial instability on the part of the borrower is important for identifying any risk of default.

Analysing a borrower’s payment behaviour will provide a more detailed picture of their present and future financial stability. While such a rating system may not be as complex as that used by the major credit agencies, it is appropriately tailored to measure the repayment reliability of the company. In future, the company looks to share the data of the payment rating system with marketplace lenders, financial institutions, regulators and other stakeholders. In essence, the above will help SMEs build their credit and payment track records and transit from being un-bankable to bankable.

Ultimately, funding for small companies should not come at a cost to investors and the overall financial systems. Experts are of the opinion that Singapore’s approach to regulating crowdfunding caters to the interests of the crowdfunding industry while providing more protection to investors than comparable jurisdictions like Hong Kong or Europe. In 2018, the estimated total GDP of all ASEAN states amounted to approximately US$2.92 trillion, a significant increase from the previous years. This amount is set to increase despite the slowdown in the coming years.

A global slowdown may dampen business sentiment, but pockets of opportunities still exist for SMEs based here willing to take the chance. While traditional sources of capital may be not so readily available, the alternative credit opportunities can be a useful lifeline and growth stimulus for SMEs.

Source: The Business Times