Alternative Financing In Asia

The alternative finance industry is fundamentally challenged by a lack of alternative credit data, especially when cash is still king among SMEs in fast growing ASEAN. Alternative lenders that make use of traditional credit data to offer commercial loans can still find it tricky to verify the credit history of SMEs and therein, any credit risk can be overstated or understated. Meanwhile suppliers that make use of traditional credit data to offer credit terms are also facing the same fundamental challenge. This leads to 2 outcomes:

Overstated credit risk: When credit risk of a commercial loan or transaction is overstated, SMEs are affected by higher cost of borrowing or shorter credit period.

Understated credit risk: When credit risk of a commercial loan or transaction is understated, alternative lenders and suppliers are affected by higher default rates and longer payment delays from SMEs.

Along with the 2 fundamental outcomes, SMEs do not have the ability to showcase their own credit reputation, adding to their own difficulty of obtaining business financing and credit terms.

In a competitive market of alternative lending, alternative lenders may serve SMEs due to higher risk appetite for a higher rate of return (excluding all defaults), but the fundamental challenge remains. While SME credit data is being accumulated by lenders and suppliers on an ongoing basis, there is a lack of a decentralized network to contribute and share credit data between all stakeholders conveniently and efficiently; which further understates the credit risk and exacerbates the default rates and payment delays. This calls into question the viability of the overall alternative lending model. A recent case from Capital Springboard, which claims to be “Singapore’s largest P2P invoice financing platform”, is a fitting reminder that even traditional credit data and credit infrastructure can still result in fraudulent outcomes.

Where alternative lending is offered via marketplace lending, high default rates and long payment delays can lead to a trust issue regarding the ability of intermediaries to manage a 2-sided marketplace in the interest of both lenders and borrowers. Statistics from MoolahSense, which claims to be “Singapore’s #1 Digital Lending Platform”, disclosed that loans made in 2018 had a non-performing rate of 28.46% (14.82% between 30 and 90 days, 13.64% above 90 days). Platforms may choose not to disclose statistics and do not adhere to any disclosure rules or standardized definition of defaults. As a result, it is common for an increasing number of retail investors to express their concerns and frustrations about the marketplace lending platforms. Ultimately, the business growth and sustainability of marketplace lending platforms rely on the trust in the platform itself. Unfortunately, non-performing loans are inevitable with the lack of traditional credit data and stakeholders will continue to lose trust in alternative lending. For the benefit of SMEs, all stakeholders need to come together to increase alternative credit data and contribute to a decentralized network that builds trust between all stakeholders.

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