P2P lenders face tough credit conditions as insolvencies hit record highs
PEER-TO-PEER lenders are keeping a close eye on credit conditions in the face of record personal and business insolvencies in the UK, with one platform already reviewing its return forecasts.
Figures released by the Insolvency Service for 2018 show personal insolvencies rose 16.2 per cent to reach their highest levels since 2011, with Individual Voluntary Arrangements (IVAs) at the highest annual level ever recorded.
Meanwhile the number of businesses that became insolvent in the 12 months to the fourth quarter of 2018 reached its highest quarterly level since 2014, rising to more than 16,000 across England and Wales.
The two types of insolvency could be connected, as entrepreneurs may be relying on personal credit cards rather than business bank overdrafts to manage their company’s cash flow. The Federation of Small Businesses said the numbers show the “huge strain” facing small businesses such as rising employment costs, business rates, and Brexit uncertainty.
Both Zopa and ArchOver are among the P2P platforms monitoring the situation, while Funding Circle has already factored it into its return projections.
“We’re always keeping a close eye on market conditions which we reflect in our latest credit policies,” said a spokesperson from P2P consumer lending giant Zopa. “We published an update in November 2018 where we announced that, overall, risk performance was in line with our expectations.”
Angus Dent, chief executive of P2P business lender ArchOver, echoed Zopa’s approach.
“We haven’t found it necessary to change,” he said. “We focus heavily on credit analysis before any loan is made, and are constantly monitoring business forecasts and business health during the term of the loan. While our processes are regularly reviewed and updated, we’ve seen no reason to do this as a result of increased insolvencies.”
Several other platforms did not respond to requests for comment.
In a recent blog post, Funding Circle’s chief risk officer Jerome Le Luel said consumer borrowing has been steadily increasing in the last two years as wage growth has failed to keep pace with the cost of living. A release from the Office for National Statistics last week confirmed that UK consumers have been living beyond their means since 2013, with household debt per head rising to 133 per cent of disposable income.
Le Luel explained how this has affected Funding Circle’s return projections.
“This has impacted a small population of loans in our higher risk bands who can be more susceptible to shifting trends in the consumer credit environment,” he said. “These headwinds are reflected in the projected returns for our 2016 and 2017 cohorts, which are 5.4 per cent – 6.3 per cent and 5.2 per cent – 6.2 per cent.”
Funding Circle regularly updates and improves its assessment models and has made some adjustments in recent months, he said, which include tightening some of its credit policies and deploying its latest risk model, which incorporates data directly from the potential borrower’s bank.
The loans that have been taken out following these adjustments are projected to deliver investors returns of six per cent to seven per cent after fees and bad debt.
Read more: Funding Circle unveils £1bn funding line