Category Archives: For Investors

‘Too important to be ignored’ – The Reserve Bank of India leads up to releasing P2P lending standards

India is a major developing economy and is forecasted to see massive economic growth in the next few years. It’s a country that can’t be ignored in the 21st century and may follow the steps of China if it plays its cards right. The Reserve Bank of India has recognised the importance of P2P lending in its most recent standards assessment and looks to publish them soon.

In a 2016 consultation paper, the RBI considered P2P lending benefits to be too important to be ignored. In a more broader sense, these standards look to establish a strong regulatory framework on capital, governance, business continuity, and customer interface alongside regulatory reporting.

This recognition could be the key to truly accelerating P2P lending internationally. At this stage, the biggest market for P2P lending has been in the USA. It is amazing to see the RBI recognise P2P lending. Over the next few decades, India may rival China’s economy and even the USA. We may see P2P lending alongside this acceleration of economic growth and truly grow into the 21st century.

It’s extremely important for developing countries to begin to understand P2P lending. Additionally, it’s important for their Governments to truly recognise the importance of setting regulation and recognising P2P lending as a legitimate form of finance for small businesses and individuals.

Though, it’s just as important for every business that provides P2P lending for them to grow into other areas of the world aside from the West. This can provide access to hundreds of millions of businesses across India, China and SEA that could benefit from P2P lending.

The team at MarketLend is excited to see what comes next out of the P2P lending standards from the RBI.

Liquidation and a downturn in the housing market: Does it spell disaster?

Phillip Parker from Altair Asset Management made a huge move last week by liquidating all of the fund’s Australian shares and returning the money back to investors. Parker stated that the bubbles in Chinese debt, overvalued property in the east coast, and overvalued equities would lead to a major shock for Australian equity investors.

 

In addition to this, we’ve seen a decrease in Australian home prices by -1.1% month on month in May and a predicted 8.3% year on year drop. AMP economist Shane Oliver stated that ‘May is weak seasonally so exaggerates but the boom is likely over’. Demand for investor credit increased by 0.6% in April, placing the annual growth of investor credit at 7.3%. Though, this could be linked to a possible increase in ‘interest-only loans’.

 

‘Interest-only’ loans allow a bank to provide the same principal mortgage, but with an interest only period for the first several years. This could sound very attractive to someone who is initially entering the housing market. Access to finance and you just have to pay back the interest for the first few years to get prepared? Sounds great.

 

Well the issue comes when we consider the fact that after that interest-only loan period, the home-owner will have to pay a higher fee for the next twenty years of the interest and principal sum. For example, by putting off paying the principal in the first five years of a twenty-five year loan, you’ve increased the amount of principal you will have to pay over the next twenty years.

 

When you consider the rate at which incomes increase, this could be perfect for someone with a fast career progression but if you aren’t going to foreseeably make more money due to an increase in living expenses or a stagnating wage, you’ll be hit with an unmanageable level of debt for two decades.

 

Overall, it seems like the Big 4 banks have over-leveraged Australian home buyers leading to a high level of risk and volatility. Richard Holden compared the level of finance accessible to a household that earns $160,000 a year in the U.S. and in Australia, adjusted for currency. In the US, this household can only access $3,733 while the same home can access $4709 in Australia.

 

We need to consider what the major risks of this type of volatility in risks are. Any major drop in unemployment, housing prices or equities could lead to a perfect storm and result in a major financial disaster in Australia.

 

P2P lending continues to grow in Europe

 

P2P-Banking.com has released its lending volumes for May 2017, and has measured a major increase in the volumes of almost all P2P market places compared to last year’s May. This has come to an approximate $500 million dollars in added volume. Globally, Morgan Stanley forecasts lending volumes of up to US$290 billion dollars by 2020.

 

We’ve seen a major increase in Chinese P2P lenders, with 2612 lenders coming out of China and turning over approximately $US$18 billion dollars in loans a month. Though, harsh central bank regulations are seeing a threat to this volume as they continue to increase regulations on P2P lending.

 

Achieving global recognition

Over the last half a decade, we’ve seen P2P lending go from a niche to a reasonable method of investing. This sort of recognition is what P2P lending needs to reach the next level and become wide-spread amongst retail investors as well.

 

A few years ago, P2P lending was considered to be a fad that would be extinguished very quickly due to its high risks for investors. Though we’ve seen some issues with Lending Club in the U.S., specifically related to some shady loans covered by Bloomberg in 2016.

 

P2P lending critics are quick to bring up Lending Club’s faults and extrapolate them to reflect the entirety of the P2P lending markets. But, we have to remember that there are a few bad eggs in any market. Conventional banking has led to some of the worst financial crises in history or do we just pretend to ignore sub-prime loans?

 

It’s important to be aware of the flaws in a financial institution but shady deals and risky ventures done in a few companies do not reflect the entirety of that financial market. P2P lending has the opportunity to excel and grow to huge levels as it garners more and more recognition in the financial sector.

 

We’re excited to be a part of this growth and we hope you have a look at MarketLend as a means of lending.

A decade of deficits: Australia’s AAA rating on the rocks

In the last federal election, Australia’s AAA rating was a hot topic that was brought up by both sides of the political spectrum. Australia’s S&P rating was threatened last year, with many predicting it to fall to AA+ in 2017 or 2018. Over the last week, we’ve seen the AAA rating re-affirmed by the S&P but placed at a high-risk.

 

Citing a decade of deficits, the S&P has highlighted the deterioration of Australia’s financial position. If the Government isn’t able to return to surplus by the early 2020s, it will most likely lose its AAA rating and be demoted to AA+. Most investors don’t solely rely on these rating agencies when making investment decisions. S&P have made mistakes before, particularly a $2 trillion arithmetic error when reviewing the US financial position.

 

Though, S&P ratings almost have a larger impact on public perception of the economy. A demotion in S&P ratings will show that Australia isn’t so immune from a recession or default. We’ve avoided recession for almost three decades, and we have a generation that has never experienced the ferocity of a major recession.

 

In addition to this, the average Australian is stuck into a lot of debt. Household debt and mortgage debt are some of the highest in the world and housing prices have seemed to be inflated for the last decade and a half. If there is a major shift in our economic climate and many lose their jobs, these high mortgages may come back to haunt them.

 

This gives the S&P ratings a lot of leverage over the average Australian. Any sign of a recession or potential unemployment will see Australians quickly saving their money. This may be a self-fulfilling prophecy as we will see a subsequent decline in spending and potential unemployment as a result.

 

The Government really has to hit the next budget out the park, improve our financial position in the world, and ensure that we don’t see a major loss in employment. These things combined may pull us back into good standing. Australia is feeling exposed right now, and high home prices and mortgages are making the average Australian feel queasy too.

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Wealth begets wealth: Are retail investors at a disadvantage?

To invest in risky early-stage private ventures, the Government must consider you to be a ‘sophisticated investor’ that is:

1. Earning an income of over $250,000 per annum in the previous two years or

2. Having net assets in excess of $2.5 million. This means that only a small fraction of the population are able to invest in these businesses.

Not only does that provide a large amount of leverage to this small group of investors, but it also impedes new businesses that are emerging and require start-up capital.

Interestingly, this is where the Government draws a line. Retail investors are still able to invest large amounts of money to risky ventures that enter through public IPO, these tend to underperform heavily and lose many retail investors money. The huge returns to be made through investment into early-stage private ventures cannot be consistently seen in the ASX. This means that the majority of retail investors are restricted to small consistent gains or losses on the ASX.

Crowd-sourced equity funding provides one solution to this, but what if a retail investor (even someone who is earning an income of $245,000 with $2.4 million dollars in assets) wants to invest in an early-stage start-up? The Government’s position on this patronises many educated and savvy investors who simply don’t meet either of those requirements.

It would be interesting to see what the Government’s angle is on this. Are “sophisticated” investors simply those that have more knowledge about the stock market as they are wealthy already? Or do they simply have the ability to take on more risk, and everybody under $250,000 in annual income or with less than $2.5 million dollars in net assets unable to do so. Well for one, it can’t be a statement about knowledge.

Even the average finance professor at an Australian University would earn less than $250,000 and you’d expect them to have at least a basic understanding of risk and shares? If it is about wealth, it seems like a very arbitrary number. The average net-worth of an Australian household in 13-14 was $809,000, meaning that a very small proportion of people would have the requisite $2.5 million dollars worth of net assets. Much of this wealth could be inherited too, and a rich gullible investor will still face the same risks of losing much of their wealth as a poor gullible investor.

I believe that the Government needs to develop a better position on who is allowed to invest in companies. The current position is patronising to retail investors, and frankly the vast majority of Australia’s population. The Government allows us to punt, gamble, and invest in risky property assets, why is the line drawn at private businesses? Something that produces a real and meaningful asset to the Australian economy, and employs our population?

What is Responsible SME lending – Altfi Conference 2017 panel discussion

Access to Finance for SMEs is critical to the growth of Australia and its position in the world:

Small and medium sized enterprises (SME) make up a massive portion of Australia’s broader economy. SMEs hire up 70.5% of private sector employees, an absolutely astounding number, and contribute 57% of the industry value added by business. As an economy, our success is heavily related to the success of SMEs. Australian politicians realise the importance of SMEs in the economy, see the latest budget for reference. They’re attempting to decrease tax rates, and increase cheap employment options for SMEs.

SMEs have had a rough few years. The global economy has come out of recession, and there is still a lot of uncertainty in capital markets and credit liquidity. Lending has tightened over the last few years, and that has put a lot of small businesses in a position which they haven’t previously been in. A third of SME’s with external finances find it hard to access finance .
To start with, let’s look at CSEF. CSEF has a lot of promise. It requires market validation and it’s a great way to enable start-ups which end up innovating, increasing the number of jobs, and the efficiency of our economy.
In addition to this, the Government’s 20% non-refundable tax offset capped at $200k per investor provides a major incentive for Angels to get involved with accelerators and venture capital. However, P2P lending is something that isn’t really focused on.
We’ve talked a lot about the regulations surrounding P2P lending and crowd sourced equity funding. Without repeating myself, the Government has taken very slow and cautious steps when dealing with P2P lending and CSEF. P2P lending has allowed SMEs to access external finance, relatively easily as well. On Marketlend and most other P2P lenders, the marketplace system rewards SMEs who are compliant, and provide as much information as possible. It allows individual investors to diversify in what they believe in, whilst bolstering the Australian economy.
It’ll be interesting to see how the Australian Government addresses the rapid expansion of CSEF and P2P lending. It’s a balancing act. Increasing compliance and regulation results in a decrease of use within these services, whilst reducing compliance and regulation might lead to very worrying results.
First loss, provision funds,  insurance and structures which conservatively manage the investors risk are more likely to become common place after incidents like the lending club in US.
Investors are likely to expect more “skin in the game”.
During the global financial crisis we saw debt structures where the originators needed to invest amounts of 1-11% subordinated debt in prime insured mortgages that were secured, and all debt issuers requiring an audit when issuing debt.
It is not a distant thought that investors are likely to expect the same in the marketplace lending space. It usually starts from the US and then it will knock on around the world.
At Marketlend we have tried to get ahead of the curve by:
a) completing a due diligence with a large global accounting firm,
b) invest in each loan and as a result offering first loss protection on each loan,
c) increasing our provision on each loan to 1%; and
d) obtain full recourse insurance on the debt finance facilities and trade finance.

We never try to suggest we can protect investors against losses on loans, and whislt we can be diligent in our origination, processing and collections, there will always be losses.

It is lending, and lending has risks. Investors should obtain their own independent legal and financal advice prior to investing in any investment on Marketlend.

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