P2P lender Validus sees 50-75% spike in applications for unsecured SME loans

Singapore

SINGAPORE peer-to-peer lender Validus Capital in March registered a 50 to 75 per cent jump in applications for unsecured loans, a sign of credit demand from cash-strapped enterprises hit by the virus outbreak.

The stronger pipeline of such "credit-approved" borrowing requests - which include working capital loans via invoice financing - come from small- and medium-sized enterprises (SMEs) that include those rejected by banks when applying for existing liquidity relief, said Validus co-founder Nikhilesh Goel.

While the Singapore government and banks have stepped up to avail more financing to SMEs, Mr Goel said the relief measures for secured lending may not be applicable to some businesses. "There are a lot of SMEs out there who don't have collateral because of the nature of their business, or maybe they have already exhausted their collateral and can't apply for secured loans," he told The Business Times in an interview.

As an example, he said established food distributors that supply to major supermarket chains in Singapore typically do not receive unsecured credit lines from banks despite their "strong profiles", as their warehouses are rented and goods sold are mostly perishable.

On the lending front, it is challenging for banks to overhaul their systems overnight to cater to SMEs that were never in their target segment.

"You're talking about large institutions where everyone is now working from home. It takes time to come up with new policies and measures. SMEs are a very tough group to serve," said Mr Goel.

As Validus' niche focus is the SME ecosystem, it has a "very high" approval rate as most loan applications are pre-approved, he said.

The firm also has plans to partner with more large corporates in Singapore to provide loan facilities to their supply chains. There are currently about 10 such partnerships, with a dozen more in the near-term pipeline. This can help to bring down the risks of defaults as Validus can finance smaller firms that are suppliers to bigger, studier companies.

Its last available non-performing loan (NPL) ratio - which refers to loans past 90 days due - stood at 2.69 per cent in 2019. This was up from 2.5 per cent in 2018. Validus did not reveal its current NPL level.

To be clear, Validus' lending rates have always been "marginally" higher than banks to account for higher risk.

BT further reported this week that Singapore's banking trio saw a surge in enterprise loan applications in the past two months from smaller companies, that is, firms that have under S$10 million in annual sales.

Interest rates for these government-assisted unsecured SME loans have come down to as low as below 3 per cent. That compares against the prevailing range of roughly 6 to 9 per cent, BT reported.

Yet, Mr Goel noted that most of the SMEs that Validus caters to have "negligible" unsecured bank loans. He reckons that means there is little price competition.

When asked if rates have increased in this period of uncertainty, he told BT the firm "regularly reviews rates", taking into account several factors including market conditions.

As cash flow pressures grow more acute for affected enterprises, Validus' 48-hour turnover time to disburse loans has also attracted more "good-quality" SMEs that would "usually go to banks as their first choice", said Mr Goel. Most banks take two to three weeks to process a loan application.

He defined these good-quality SMEs as those that were on a growth trajectory before the crisis, or have ranked high on creditworthiness on Validus' risk algorithm.

"When things are really bad, SMEs need financial institutions that can (lend) them money in a few days. They need that certainty, they do not have the luxury of time to wait around."

The firm sees this as an opportunity to convert such SMEs into long-term customers. "They are now cash-strapped and come to businesses like us for cash on demand. They are somewhat forced to try more of our products and hopefully, will stay with us for the long term," said Mr Goel.

About 85 per cent of Validus' current portfolio is focused on essential services that are likely to remain open in a lockdown. The majority of SMEs that applied for loans in March are in the construction, manufacturing and wholesale industries.

In this current climate, most of the firm's investors have since adopted a wait-and-see approach on investing.

"Most are not taking money out, but they're also not growing their portfolios. We can continue lending to the marketplace as a big chunk of our investors are still with us," said Mr Goel, adding that Validus recently onboarded a new family office with a starting investment of a few million dollars.

The firm in February rolled out a S$50 million support package with measures such as increased financing limit and longer repayment terms. Around 150 SMEs have since benefited from higher borrowing limits.

While Validus has received some requests for repayment deferments, Mr Goel said almost 90 per cent of the firm's portfolio comprises invoice financing or purchase order financing - where the repayment comes from large corporates or government buyers - and hence remain "largely unaffected".

February was a record month for the firm, in terms of loan disbursement volumes. Amid rising global uncertainty, March volumes fell to levels similar to that in Q4 2019, signalling "some resilience" for the firm as it looks to "grow cautiously" in the current downturn, said Mr Goel.