Funding Societies’ Teo: “We brought our cash burn down by about 50%”
Kelvin Teo, group CEO of Funding Societies, shares key challenges faced during the pandemic and the initiatives needed to address growing credit risks
- Funding Societies reduced its operational costs and cash burn by 50% during the pandemic
- It managed to keep its default rate below 2% by focusing on selected industries and increased asset backed products
- The company has disbursed $1.5 billion loans to date although its annual growth rate of loans disbursed slowed in 2020
Funding Societies, a peer-to-peer (P2P) lending fintech that operates in Singapore, Malaysia, and Indonesia (as Modalku), focuses on meeting the short-term credit needs of small and medium enterprises (SMEs). The company began its operations in Thailand early this year. The challenges brought about by the COVID-19 pandemic forced the company to undertake several initiatives to manage its credit risks and operational efficiency. Kelvin Teo, Group CEO and co-founder of Funding Societies, explained, “In 2020, we reassessed our spending, re-negotiated costs with our vendors, became more prudent with our expenditures, and improved productivity. This helped to bring our cash burn down by about 50%”. The company had raised Series C funding of $40 million in April 2020.
Increased credit risk during the pandemic
Financing needs of SMEs increased during the pandemic but so did the credit risks and non-performing loans (NPL). Investors’ risk appetite shrunk and lending companies were forced to narrow their risk assessment criteria and strategies.
Teo shared, “For new SME customers we tightened our credit assessment and lent only to industries that are performing well during the pandemic such as healthcare, transportation and medical supplies. We have reduced the tenor of our loans further and stepped up asset-backed products to mitigate pandemic-related risks. Our team engaged with existing SME customers early to understand their situation and strike the right balance between helping SMEs and protecting investors’ interest”.
Teo attributes his company’s credit risk management to its proprietary technology, use of non-traditional data through its business-to-business (B2B) digital platform partnerships and supply chain finance platform and its ability to digitalise human intuition.
As SMEs faced financial difficulties during the pandemic, the company’s default rate reportedly increased from 1% at the start of 2020 to 1.59% in June 2020. However, the company managed to bring it down to 1.3% by December 2020. In Indonesia its current NPL ratio is 0.76% but it is higher in Malaysia at 3.27%.
Balancing the portfolio risks while meeting the financial needs of SMEs has become increasingly challenging for lending companies during the pandemic. In Indonesia, the data from the financial regulator Financial Services Authority, Otoritas Jasa Keuangan (OJK), shows that NPL of the fintech lending industry increased from 3.65% in December 2019 to 8.27% in September 2020 and stood at 4.78% in December 2020.
Among other peer-to-peer (P2P) lending companies in Singapore, Validus reported an NPL rate of 1.99%, Minterest had 1.62%, and Capital Match, which primarily focuses on invoice finance, reported 0.36% in 2020.
In Singapore, the government enhanced its Enterprise Financing Scheme (EFS) for SME working capital loans and trade loans. Under these schemes, the Enterprise Singapore (ESG) takes up to 90% of the loan risk. Funding Societies' direct lending entity, FS Capital is also a participating financial institution (FI) under ESG’s financing scheme, contributing to its loan volumes since November 2020.
It has disbursed $1.5 billion loans to date
Funding Societies announced recently that it has disbursed a total of SGD 2 billion ($1.5 billion) through 3.7 million loans to 65,000 SMEs, partly funded by 200,000 retail investors.
It claims that about SGD 850 million ($630 million) loans were disbursed in 2020, compared to about $545 million disbursed in 2019, indicating a growth rate of about 15%. In 2019, the company had reportedly increased its loans disbursed by 194% over the previous year.
The industry landscape also changed during the pandemic. The partnerships between FIs and fintechs increased, digitisation accelerated, businesses have become more adaptable to remote operations; credit risk management became more stringent while SMEs have become more receptive to digital financing.
Keywords: P2P, Credit Risk, NPL, Risk Management