When it comes to P2P Lending, what is a Provision Fund?
Last week there was some controversy when one of the larger platforms, in the interests of transparency, published the size of their Provision Fund and how they managed it. The platform in question cited a Provision Fund of £17m and interestingly it was not the size of the fund but how it was managed that was picked up on a few of the P2P forums and Alt Fi News.
It got us thinking, as P2P platform investors seem to take great comfort from its existence, what exactly is a Provision Fund?
Research across the major platforms reveals the most basic recurring explanation goes along the lines of, if a borrower misses a payment or is unable to payback their loan then the Provision Fund will make up the loss, with the caveat, providing there are sufficient funds available. It seems that provision funds usually run at c2% of the outstanding loans on the platform.
So we relate this to our platform, Proplend, as we don’t have what most investors would regard as a Provision or Safeguard Fund per se.
Proplend is an asset-backed or secured loan platform, facilitating loans secured against income producing commercial property. Should a borrower be unable to pay back their loan then the security held under the fully documented first legal charge would be sold, and its proceeds used to repay the outstanding loan contracts.
Proplend also retains 6 months’ interest reserve from every borrower to be used should whatever reason a borrower misses an interest payment when it falls due.
The size of our “Provision Fund,” the value of Security held plus the cash Interest Reserve, currently stands at £11.85m or 158% of the outstanding loan book, this is before we include any additional security held, such as personal guarantees from borrowers.
So it seems that Proplend does operate a ‘Provision Fund’, albeit not in name as such, and what’s more it offers our investors vastly enhanced risk adjusted returns.