The peer-to-peer lending sector is set to get its first test of survival in an economic downturn after the UK officially entered recession.
Official for National Statistics data showed the UK entered recession for the first time in 11 years after the economy shrunk by 20.4 per cent between the first and second quarter of 2020.
This pushed the UK into a technical recession.
The previous official recession in the UK was in 2009 when there was just one P2P lender in existence, Zopa.
More than a decade on, there are now more than 50 P2P lending platforms, across a mix of business, consumer, invoice finance and property lenders.
The sector has already been through a big economic test during the coronavirus outbreak and platforms have had to navigate increased withdrawal requests from investors and the need for payment breaks from borrowers.
P2P lenders have previously been bullish about a recession, highlighting that the sector was born out of the 2008 financial crisis when banks stopped lending.
The sector is now becoming a more attractive proposition than its early days as more institutional investors are interested in the asset class, alongside retail investors looking for uncorrelated returns, as Roxana Mohammadian-Molina, chief strategy officer for P2P property lender Blend Network, points out.
“Given the volatility in equity markets and the low yield on government bonds, there are not many places to park your cash if you are an investor, and high-net-worths and family offices need to deploy their funds,” she said.
“Most of them don’t have an origination and underwriting arm, so they are using P2P platforms to essentially originate loans for them to do private lending.
“That’s what we have seen ourselves as we have many family offices and HNW lenders.
“As P2P consolidates its position as an ‘asset class’, more institutional lenders want to lend.
“We are having many conversations with institutional lenders and onboarding some as well.”
Platforms may have to adjust their lending criteria to navigate the coronavirus crunch.
Ben Shaw, founder of asset-backed lender HNW Lending, said the platform changed its investment criteria as lockdown started to be “significantly more prudent.”
“We have turned down quite a number of loan applications that would have been funded pre-lockdown,” he said.
“This is primarily to protect investors against potential losses as it is far from clear how businesses would react to lockdown and then bounce back from lockdown. In addition, it is far from clear what the impact will be on asset prices, particularly property.
“The result is that while we continue to lend, we are more conservative in our lending criteria and also have preferred extending further credit to existing borrowers with good track records.”
Bank lending traditionally becomes tougher during a recession and that has already been seen in the mortgage market.
But borrowers still need to move home or fund personal or business loans so entering a technical recession may literally give P2P lenders a chance to put their, or their investor’s money, where their mouth is to demonstrate that the sector has become a viable alternative.
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