Vertex-backed Validus to apply for Singapore digital-banking licence

SINGAPORE'S largest peer-to-peer lending platform Validus Capital will apply for a digital banking licence here, joining a growing chorus of non-bank challengers looking to edge into this new space.

Validus, which is backed by Temasek Holding's Vertex Ventures, told The Business Times (BT) on Wednesday that it will apply for a licence once applications are open by the Monetary Authority of Singapore (MAS) in August.

BT understands it is currently engaged with the regulator to understand if it should apply for the digital full-bank licences, or the digital wholesale bank licences. Singapore last Friday said it plans to issue a maximum of five new digital-bank licences, comprising up to two digital full-bank licences, and up to three digital wholesale bank licences.

The peer-to-peer lender, which is also backed by the Netherlands' development bank FMO, said it is "well-positioned" to become one of the country's first digital banks. It told BT that evolving into a digital bank would allow Validus to offer more solutions tailored to small and medium enterprises (SMEs) - from deposits, to payments, remittances, FX and lending solutions.

Validus' CEO Ajit Raikar, and the former head of SME banking at DBS, told BT: "Validus Capital welcomes the liberalisation of Singapore's banking system and the next step for us naturally is to apply for a digital banking licence. Since our inception in 2015, Validus has been addressing the unmet needs of fast-growing SMEs through collaboration with banks and corporates. We are ready to evolve into a full-service digital bank to connect communities and millennials who are digitally savvy with businesses."

Since its inception in 2015, Validus has now disbursed nearly S$250 million to date - or close to S$20 million each month - offering growth financing without the need for small businesses to pledge any hard collateral, as is commonly required by banks.

Validus matches funds from accredited and institutional investors on its platform to SMEs that need loans. It derives a lending rate via its credit assessment model that mainly analyses trade data from these businesses to gauge the credit-worthiness of each SME. Validus earns a fee from matching loans to small businesses.

Validus uses a targeted approach of lending to SMEs with top corporate customers behind them. With about four years of experience, Validus now uses its credit assessment model to offer loans to these SMEs at rates as low as 4-6 per cent on an annualised basis, or what banks would typically offer SMEs that qualify under their credit assessment models.

Validus has worked so far with several large corporates in Singapore, including ST Engineering, large shipyards and the country's largest logistics and transport provider, to tap the thousands of vendors that hold contracts with these bluechip firms. These large corporates - with revenues of between S$100 million and S$5 billion - are eager to ensure that their small contractors and suppliers have adequate financing to complete projects on schedule.

In effect, Validus is looking at the top corporates' risk profile - which tends to be lower than the small vendor supplier - and giving the SMEs the equivalent lending rate to an "ST-Engineering bond rate", Validus had told BT in February.

Validus told BT on Wednesday that this is how it has delivered "meaningful social impact" in Singapore.

MAS has announced last week that applicants for the digital full-bank licences must have a track record in operating an existing business, or in technology and e-commerce fields. They must also show clearly how they can tackle unmet needs, and show they have a sustainable digital-banking business model.

Any competition deemed to be "value-destructive" will not qualify. MAS will look at the financial projections from the applicants such as cost-to-income ratio, and projected net interest margin.

Digital-bank applicants must all meet the same capital requirements as local banks, meaning that they need to keep a specific amount of capital against loans assessed on a risk-weighed basis, effectively to buffer against loan losses.

Singapore banks keep a Common Equity Tier 1 (CET1) ratio of 6.5 per cent, with total capital adequacy ratio at 10 per cent. The CET1 ratio refers to a bank's core equity capital against its risk-weighted assets, which includes shareholders' equity and retained earnings. Singapore banks also keep a capital conservation buffer of 2.5 per cent, and up to 2.5 per cent as a countercyclical capital buffer.