Trevor O’Sullivan, partner, financial services restructuring at Grant Thornton, tells platforms what they can do now to survive in the post-pandemic economy…
Peer-to-peer lending platforms should act now to secure the funding lines that they will need in the event of a post-pandemic spike in loan defaults.
Trevor O’Sullivan, a partner in the financial services restructuring team at Grant Thornton, has warned that defaults are set to rise sharply when government lending schemes and other support measures come to an end in 2021, and small businesses have to start repaying their debts.
“The economy is currently shielded from what’s going on,” says O’Sullivan. “But this is the time for lenders to start looking at their processes and seeing what they can do to strengthen themselves now, before it’s too late. The stronger lenders will come out the other side and will be more resilient as a result.”
O’Sullivan notes that restructuring and turnaround teams across the board are not currently as busy as they were this time last year, most likely due to the volume of state support which is being offered to struggling businesses. However, in 2021, when government support comes to an end and businesses must make any deferred tax and rental payments as well as start to pay down their government-backed debt, defaults are expected to spike and lenders could be faced with some difficult decisions.
“If you look at the major retail banks or larger commercial banks, they are all increasing their collections teams and distressed business support because they are expecting a significant increase in defaults in their portfolios at some point in 2021 or 2022,” says O’Sullivan. “That’s when you will start to see a lot of companies really suffering.”
In order to survive this period, P2P lenders will need to have access to funding channels which can be tapped if needed. “Sometimes, as part of restructuring, you have to lend the borrower even more money,” explains O’Sullivan. “And if you don’t have access to that sort of funding, then the borrower may fail, and ultimately that could put you as the lender at risk.”
The Covid-19 pandemic represents the first time that many P2P platforms have had to operate in an economic recession. This brings challenges, O’Sullivan says. “These newer P2P firms will have never gone through a downward cycle or a stress cycle,” he warns. “P2P lending platforms should invest in their process for identifying and dealing with borrowers in distress before things reach a point of no return.”
When speaking to lenders, Grant Thornton asks: what are you starting to do now to protect yourselves? What kind of credit process are you putting in place? And do you have access to people who have experienced a downturn and really understand how to protect the borrower and the platform as well?
“If you do this properly, both your borrower and the platform will come out stronger,” he says. “It’s a fundamental reality that platforms have to have the firepower to weather the economic storm. “Even if you don’t think this applies to you, you still need to be aware of the risks to your business.”
The Covid-19 vaccine may be on its way, but nobody is immune from the economic aftershocks of the pandemic. However, prudent risk management can go a long way towards securing the future of the P2P sector.