Funding Societies’ Rising Default Rate Paints Worrying State Of SG Businesses

Few nights ago, Mrs Budget shared something which we thought we should pen our thoughts down.

So over the past few months, Mrs Budget has been cashing out the money payments received from the loans she backed through funding society, a peer to peer loan financing company.

If you are unfamiliar with funding society, basically you can go onto the platform, look at profiles of companies who are asking for loans, and decide if you want to loan and help the companies out.

As these companies are usually rejected by bank loans due to higher risk, the interest on these loans can go up to between 10 – 20%.

Both Mr and Mrs Budget has been putting a small amount of money backing SMEs in Singapore, probably about S$5,000 total each.

For Mrs Budget, she shared that during the past few weeks, she has seen a lot of loan defaults on Funding Society, and that her capital is now mostly turning into a loss position, with only small chance of recovery.

What it means is that, Mrs Budget will most likely lose up to S$3,000 from funding society due to a non recoverable loan default!

For Mr Budget, he is still quite fortunate as his loans are quite diversified across many companies,. With his loan exposure per company set at S$200 max per company, the default rate is still quite manageable.

However, since February, Mr Budget has already disabled the auto-invest function under Funding Society and is now only collecting all the disbursed loans.

What he also noticed is that, the defaulting companies are skyrocketing since he last checked! Hopefully there will be lesser defaulting and non recoverable loans.

We also saw similar reviews on Seedly where a lot of retail investors have been saying that they are now sitting on capital losses although they have been investing for a while now.

Most of the investors on Funding Societies shared the same situation: investing over 2 to 3 years, from net gain to now net loss.

And all of this started in the past few months.

“Well, I would like to share my experience with this platform & anyone who is investing in P2P lending. In the span of the last 2.5 years, I invested around 100000 SGD on which I made around 4K SGD as profit after all the fees after 2.5 years. I thought I was making some real profits, however soon my dreams got shattered when almost 5-6 of my loans got default & resulting in loss of around 9k SG. There you go my 4k profit changes into 5k loss from my own pocket. Now forget about interest or profit I couldn’t able to protect my principle.”

To be fair, I don’t think its entirely Funding Societies’ problem. When times are good and when people earned up to 10% a year in the early days, no one complains. And now when companies start to belly up, then people complain.

Returns on investment for loans are also decreasing year on year

Increasingly, I think more of these businesses are going to face more problems with cash flow, which will lead to loan defaults, and closure of businesses. Closure of businesses will then lead to unemployment, and then leading to individual cash flow problems.

This gives an early indication of the state of businesses in Singapore, and I think we are going to hear more from mainstream news soon.

Funding Societies or P2P loans are secondary market which provides liquidity for businesses – and with default rates ballooning up, this is yet another clear sign and indication that things will get worse.

For investors thinking of investing in high risk investment vehicles, this is definitely not a good time right now. For the amount of risk for platforms like Funding Societies, they will probably need to return 20-40%, as compared to a 3.35% – 23.87% return on investment based on 2019 figures.

Also Read: Our Thoughts On The Very Irrational Market Behaviour

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3 thoughts on “Funding Societies’ Rising Default Rate Paints Worrying State Of SG Businesses

  1. This is a good topic to write about, especially in times likes these. I didn’t even consider the impact of Covid-19 to investors in P2P lending platforms that provide financing primarily to Singapore SMEs. Which have been badly affected by the circuit breaker measures and hence the higher default rates. Thanks for highlighting!

    Like

  2. So glad I got out of FS 2 years ago. I invested in 10 SMEs, and 2 defaulted. It was impossible to know who would default or not based on the provided factsheets. It really is just luck.

    That said, it is not so much the fault of FS then the state of the economy now. People were warned at the start there could be defaults. At rates of 7% or more, it is considered a high-risk investment. Every single other high-risk investment out there has gone down too.

    Like

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