In my last article, I looked at RateSetter’s loan book to see if early trends were indicating a change in borrower’s ability to repay their loans. I concluded it was too early to tell and RateSetter have made a similar statement, although conceding they expect hardship to effectively double.
Currently, fewer than 2% of RateSetter Lending Platform borrowers are subject to financial hardship arrangements, although we currently expect this to increase to around 4% over coming months. — RateSetter Blog Post. 14 April 2020
I further suggested the increase in green loans may accelerate and be beneficial to lenders as other consumer loans, e.g. those for holidays, weddings and cars, are likely to dry up for the time being.
A key question then is to what extent green loans can help keep peer-to-peer lending afloat as the economy tumbles towards a downturn, undoubtedly impacting consumer loans and the volume brokered through RateSetter.
As always, let’s get one thing out of the way from the start. This post is in no way endorsed by RateSetter nor should this be seen as financial advice of any kind! I am merely a peer to peer investor and care about my RateSetter loans.
Credit to their strong commitment to open data, RateSetter regularly publish their loan book and this has been the basis of this analysis.
A brief history: It has been close to three years since RateSetter Australia begun allowing investors to lend money to businesses and consumer to finance green energy-related investments, such as solar panels and energy storage.
This was initially funded by the government through the Clean Energy Finance Corporation to the tune of AUD 20 million in May 2017.
About 18 months later this extended to another $100 million, earmarked specifically for the South Australian Home Battery Scheme. Since the beginning of 2019, more than $10 million worth of loans have been brokered in SA, suggesting there is at least another $90 million to go, not counting retail investors contributions.
Since those partnerships have been announced, green lending across RateSetter has increased to a total of $70 million as at the end of March 2020. Minus the $30 million from the Clean Energy Finance Corporation, this means at least $40 million of those funded by retail lenders.
What is happening to loan volumes?
As I looked at in my last article, loan volume across the platform has begun to drop towards the end of the last quarter.
Any prolonged drop in volume is a problem for all three parties in peer-to-peer lending, regardless if due to less supply (lenders) or less demand (borrowers).
For RateSetter as the provider of the platform, less volume means less revenue.
For Borrowers, less volume, i.e. supply from lenders, mean higher and more volatile rates.
For Lenders, less volume due to decreased demand from borrowers or stricter lending regulations imposed by RateSetter, mean lower rates. But it doesn’t end there, decreased volume due to less supply from other lenders is equally problematic for two reasons:
- Short term loans, i.e. those less than 3 years in duration, are not regularly replaced and therefore money is tied up for longer *
- Early access is unavailable without replacement funds.
Both cases mean lenders may not be able to access funds as readily as they would during normal times, causing concerns.
All three parties rely on steady loan volumes and a key consideration is if Green Loans can make up for the volume drop of other loans?
The number and overall volume in green loans across the platform have been increasing steadily.
In the most recent quarter, more than 25% of all loans were green loans, contributing about $10 million or ca. 18% of the value of all loans.
The proportional increase of green energy loans is no surprise. There has been a nominal increase of about 3% quarter on quarter for green loans, while the overall loan volume dropped by close to 6% with the first signs of COVID-19 impacting consumer loans. And this will continue as previously popular consumer loans, for example for holidays, weddings and cars, are likely to dry up for the time being. Also, RateSetter have announced stricter borrower risk assessments which will further restrict volumes.
So green loans are getting more important proportionally to all other loans, but overall, the roughly $10 million in green loans per quarter are still dwarfed by the ca. 50$ million of loans in the other categories.
And the increase in green loans is slowing too. While in the past it rose by 20% and more per quarter, it levelled recently as the green loan market matured.
And while the solar industry suggests now is a better time than ever to invest in solar and solar installations across the country are on a strong upward trend (see below), there is no evidence to suggest a spike in green loan demand in RateSetter strong enough to make up for the loss of volume in other loans. Even assuming, what may be a conservative, 50% drop in other categories, green loan value would have to triple and more to make up for the loss in other volumes…..not going to happen.
For lenders, however, focusing on green loans may still be attractive as they tend to be of higher quality and have less risk associated:
- Almost 50% of green borrowers have an income of 150k and more, versus less than 10% of all other types of loans.
- 90% of all green loans go to homeowners, versus 45% for all other loans.
- 7.5% of all non-green loans are currently in arrears or hardship. This number stands at only 2.5% for green loans, suggesting a currently better ability for borrowers to repay their loans.
- Borrowers are getting a return on their investment. While most consumer loans are a liability on the borrower, green loans provide a return on the investment in the form of lower energy bills or even credit.
On the downside, due to lower risks in borrower’s default and possible competitive rates through other lenders, green loans offer lower returns for lenders, especially in the SA Renewable Energy market.
Summary
The total value of green loans in RateSetter is still trending upwards as of March 2020. This is good for all three parties in the peer-to-peer lending process.
Green loans are good for borrowers as rates remain steady.
They are good for lenders with a long-term view to lend as they provide a safer form of loan, albeit less attractive returns.
And Green loans are good for RateSetter as they have continued to increase in volume, even as the first signs of the economic downturn have impacted the platform.
While overall this is an encouraging trend that is likely to continue, the increase is nowhere near steep enough to make up for the loss of volume in other loan categories.
The question of this article was to understand if green loans can save RateSetter’s quickly dropping volume and the answer to that is NO. Nevertheless, green loans are likely to provide a solid base among the other loan categories continuing to be volatile and therefore could be an attractive alternative to those lenders who are seeking less risk in peer-to-peer lending.
*NOTE: This is somewhat complicated and calls for an article on its own. But in essence, loans in the 1-month rolling market are only paid back if replacement funds of other lenders are available. If not, the funds are continuously reinvested without the lender being able to access the funds, while still receiving interest. In times of normal volume, this is not a problem, but becomes a case of uncertainty and concern during times of volume crunch.
