P2P lending and the case of the policing failure

Not so long ago, I have given my simple review on one of the biggest and fastest-growing P2P lending firms in Singapore, Funding Societies. (You can view it here.)

And if you had managed to read till the end of that said post, you would have known that my take on the P2P industry is less positive when I advise potential and ongoing P2P investors to consider their options clearly and rationally.

This clear-headedness for P2P investing should be necessary as a result of what the P2P business has caused chinese investors.

“A dramatic case of a single mother losing her late husband’s insurance payout, amounting to a shocking 3.8 million RMB, shows us the importance of not overweighting on alternative investments. A few thousands P2P companies in China have defaulted since.”

What can we learn from China P2P lending?

Individual lenders underestimated risks and overestimated returns

If anything, it shows that we should not invest in what we do not actually know. I can assure you that most of these investors were allured by the fat-yielding rewards.

Honestly, it is perfectly fine to invest in high-return products, really.

However, one has to understand how these high yields come about and whether taking those risks make sense or not. If more P2P investors had tried to do this, more would have been thankful for not putting their entire nest egg in this frisky, yet unpredictable investment.

Chinese P2P firms took advantage of ‘P2P lending’ craze and excitement

Same goes for P2P firms themselves. The problem was that either the P2P companies did not know what they were investing in, or that profiting was dependent on them not knowing. These shadow banks in China sprouted like weeds all over and were very keen on loaning to any random being that was wiling to take the money and sign the loan.

Just like how history will never be expected to repeat itself, it however did.

In 2008, the global financial meltdown can be majorly attributed to the sub-prime mortgage crisis. Back then, banks were also eagerly signing housing loans to anyone in the streets who were willing to pay for them.

Surprise surprise, the same thing has happened with P2P lending.

Chinese regulators are not doing their policing job well enough

Well, the last ingredient in the disaster recipe was the lack of regulations in new and upcoming P2P firms.

There were P2P firms in China that operated like pyramid schemes by offsetting outgoing investing payouts with incoming maiden investments. Some didn’t even bother trying to act, they just took investment monies firsthand and fled away.

These could have been prevented with stricter regulations on P2P firms. Their way of assessing potential borrowers’ reliabilities to pay back should also be heavily scrutinised.

Conclusion

Well, conclusion is this. There will always be scammers out there. Doing a little due diligence and erring on the safe side will almost guarantee oneself from falling into a trap.

Apart from scammers, there were also legit P2P companies that had credit analysis frameworks that failed. This is an inevitable risk that one shall understand and is willing to undertake when one puts money into P2P lending businesses.

Also, for ultra legit P2P companies like Funding Societies, are there any safety net or recourse for a systematic risk where SMEs fail due to poor economic outlook, causing multiple loans to default all at once?

Well, the nice thing is that FS loans in general are quite short, ranging from 3 months to a few years. Hence, a bear market may not result in a complete default but a partial repayment, which is not a bad thing for a worse case scenario outcome.

They are usually protected loans as well, either by properties or guarantor backings.

What will SG Finance Guy do?

Well, as they always say, no risks no gains. You can always buy government-backed bonds and die one day feeling mehhh or you can increase your returns by allocating a tiny amount in alternative investments like P2P lending.

Singapore P2P lending business has been growing but we have to watch it and ensure that it is healthy, not like those in China.

I am optimistic of P2P lending when done ethically and responsibly. It shall have the potential of taking on conventional banking loans, like in the case of David versus Goliath.

Hence, I will most likely keep 1-2% of my portfolio in P2P lending. Specifically, I will also prefer to avoid placing everything in a single loan but spread it out at least 1/10th thin. Also, property-backed loans or secured loans will be more favourable as a form of additional safety.

Lastly, I will keep watch of P2P developments in Singapore to take care of the ‘healthy growth’ part.

PS: Do drop by my Funding Societies review here if you haven’t. It could just be the day you start investing in P2P lending 🙂

 

 

 

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