P2P platforms monitoring lending risk amid interest rate cut
Peer-to-peer lenders are keeping their returns under consideration after the Bank of England cut interest rates back to a record low of 0.25 per cent and warned of economic uncertainty.
The shock cut by the Bank of England’s monetary policy committee comes amid concerns about the impact of the coronavirus epidemic on business and consumer confidence.
The Bank of England accompanied its rate cut with a warning that disruptions to supply chains and weaker activity caused by coronavirus could increase demand for short-term credit from households and for working capital from companies.
P2P platforms are reviewing whether this creates a riskier lending environment, which could actually push up loan pricing for borrowers and may increase returns for investors.
Read more: P2P lenders lay out Budget requests
“Our rates are not connected to the Bank of England base rate but it is a Financial Conduct Authority (FCA) requirement to price loans for risk,” Stuart Law, chief executive of P2P business lender Assetz Capital, said.
“Some businesses will be more affected by coronavirus than others, such as retail and restaurants.
“If we perceive a bigger chance of loans defaulting then the risk goes up and our interest rates increase.
“There are no plans to do this at the moment but we are keeping things under consideration.
“If borrower rates went up that could boost returns for investors or we may put more money into the provision fund.”
Nick Harding, chief executive of Lending Works, said the situation is under regular review.
“The question we are asking ourselves is how lasting will the impact of coronavirus will be,” he said.
“The Bank of England is forecasting a temporary reduction in economic activity in the UK, and their measures have been put in place to cushion against this.
“If indeed the reduction in activity is temporary, then I believe the impact to loan pricing or indeed lender returns will be muted.
“At Lending Works we are reviewing the situation regularly, and have added a standing agenda item to each of our relevant committees.”
One positive for P2P lenders is that the rate reduction boosts the attractiveness of backing P2P loans through an Innovative Finance ISA (IFISA) compared with leaving money in a cash ISAs, especially if the rate cut is passed on to savers.
P2P loans are also uncorrelated to stockmarket volatility which will have hit investors with stocks and shares ISAs.
“The Bank of England is doing what is necessary to support the economy at this difficult time,” a spokesman for RateSetter, said.
“However, for savers this means the interest rates on cash will inevitably soon go close to zero.
“This will see people looking at alternatives in order to keep their money earning, especially with the ISA deadline just round the corner.
“With investing in equities extremely volatile, investing in loans through platforms such as RateSetter will stand out for its steady returns.”
Read more: Could P2P lending combat coronavirus market fears?
