Our Head of Investor Relations and Corporate Development, Milena Naitoh, answers some of the most common questions about investing in SME lending and addresses how Validus manages risk and safeguards investors’ interest on the Validus platform.
1) I’m new to P2P lending. What are the key risks involved with investing in the SME asset class?
There are a total of five which I’ll like to highlight:
- Capital Risk: Applicable for any investment that is not covered by a guarantee of the principal amount invested. Every investment instrument carries some degree of capital risk, whether partial or full, and unsecured P2P lending is no exception.
- Liquidity Risk: Occurs when capital tied into existing outstanding investments may result in an investor’s inability to meet his or her short-term debt obligations. Facilities on P2P lending platforms cannot be sold and are typically non-transferrable; hence, once an investor has deployed capital into a loan to an SME, he or she has to wait until the end of the loan tenor (maturity) to withdraw any outstanding principal and unlock liquidity. While Validus’ loans are short-term instruments, they are still subject to these nearer-term lock-in periods until maturity.
- Credit Risk: Possibility of a loss resulting from a borrower’s failure to repay a loan or meet contractual obligations
- Concentration Risk: Occurs when the investor does not diversify his or her portfolio and concentrates only on a particular facility, product, industry, or borrower
- Fraud Risk: Examples include related party transactions or fraudulent transactions sanctioned due to falsified or manipulated financial statements, including liabilities and expenses; unfortunately, fraud risk susceptibility spans asset classes, including property, equities, and fixed income, where there are multiple transactions and parties involved. Validus strives to minimise these risks through data and FinTech driven mechanisms.
2) What are the risk mitigation strategies that Validus employs?
Partnership-led origination – Under our Corporate Vendor Financing program, we partner with corporates, including government-linked entities, multinational corporations, and blue-chip companies, to support the cash-flow needs of their supply chains. Our financing support allows these SME suppliers to unlock working capital and, in turn, helps corporates to strengthen their supply chain by ensuring that their vendors have adequate capital to deliver projects and orders.
Ring-fenced repayment mechanism – SME Vendors (Borrowers) submit their verified invoices to Validus, and upon approval, we will disburse up to 80% of the invoice amount to the borrower. Once our corporate partner makes payment based on the invoice’s terms, we will send the borrower the balance amount, less the interest payable to the investors in the loan. Payment is ring-fenced as our corporate partner makes payment directly to Validus (under an escrow account structure managed by a third-party escrow agent), mitigating risk by reducing the movement of funds. Under a normal arrangement, the corporate would pay the SME based on the invoice, and we would then await the SME to repay us. Instead, the risk is being transferred to the counterparty, a large and oftentimes blue-chip or government-linked entity.
Verified Invoices and Work Orders – Notice of Redirect Payment (NRP); an agreement signed by an authorized member of the corporation helps ensure that invoices and work orders are genuine.
Access to ERP System of Corporate Partners – This allows us to view the payment statuses of the invoices and the expected repayment date from the end-buyer.
Client Acquisition Method – Our SME borrowers are many a time repeat customers. They have displayed and maintained a healthy repayment history with Validus, which we monitor and proactively address using data analytics.
Insurance – We became the first platform in Southeast Asia to offer a unique insurance cover and are now serviced by a global leading trade insurer, Coface. Coface insures select trade financing facilities on the Validus platform, essentially protecting 100% of investors’ principal amount invested in these facilities.
3) I’m an investor on the platform, and I do see some facilities facing delays in repayment. Why does that happen?
Here are a couple of reasons you may experience and notice delays for each of our product types:
Invoice Financing – There may be a mismatch between the payment cycle of the end-buyer, who will have a procurement and finance team managing bulk vendor payments, irrespective of project completion date based on internal processes. This mismatch is one reason why SMEs require financing to support the cash flow of their business to continue project delivery in the interim pending payment from their buyers. At the same time, the borrower may have a credit term from Validus, which varies based on the time that he approached us for financing following the invoicing to the corporate, which does not precisely correspond to the tenor (end-date) of the said facility.
Purchase Order Financing – Delays may occur when the SME borrower would only be able to invoice based on the progress of the related project’s phases and only upon each completed round. The SME does not work in a silo, and hence his delivery could be dependent upon the works of other vendors involved in the project or the corporate’s own procedures and timelines.
Working Capital Financing – Occasionally, an SME borrower may request partial payments for their monthly installments due to slower months or unforeseen circumstances in their sectors of operation. In such cases, we will carefully evaluate their circumstances and financial position before granting such a request to ensure that they will meet obligations if placed over an extended period of time.
4) What happens in the event of a default?
Loan restructuring may be made available to a communicative and credit-worthy SME borrower, done on a case-by-case basis. Our Collections team will carefully monitor to ensure repayments as agreed to the schedule and ensure a step-up in payment installments once financial stability or gradual recovery from the extenuating circumstances brought about the restructure is observed.
We have a robust collections process to which we adhere, managed by a dedicated in-house team, and the actions taken are unique to each case. In the event of a default, investors can expect to be contacted immediately by their dedicated RMs and updated on an ongoing basis through the platform. Investors are continuously briefed on the next steps which the team will undertake.