There hasn't been this much risk since 2008
JOHANNESBURG – Alternate lending, including fintech offerings, have a vital role to play in the future of our economy. But in the current environment, there is a cautionary tale for both want-to-be lenders and consumers.
In a downturn economy, there are deals to be had – but at what price? The contracting economy as well as the prominent global success of a few fintech start-ups has encouraged a plethora of new alternate lenders in the local market.
Whether business-to-business or business-to-consumer, many of these start-ups are taking an aggressive, and often reckless stance, on their lending criteria.
One of the main problems is some investors are unsure of where to put their money, especially in a tighter market. They see how lenders (especially fintechs) are getting good returns and so they believe this to be the answer to their needs.
We’ve seen a number of smart people, many of whom have a deep understanding of the tech world, but have never been involved in the local lending space before, start businesses that follow international fintech models.
Added to this, while our local market used to have perhaps a handful of non-bank lenders a few years ago, now we are seeing many more. While competition is great for the market and the consumer, we are seeing the kind of asset-based deals that we last saw in 2007 and 2008.
While the banks are focusing on serviceability as the best way to judge eligibility, some of the newer and more cavalier lenders are taking a purely asset-based view.
In some cases, even where there are solid assets behind the deal, business owners are being charged rates of 3 percent and higher a month (more than 36 percent per annum), where the loan should attract more favourable rates.
Some market insiders believe the current economy is worse than it was in 2008, but still not quite as bad as the early 1990s.
However, weaker-than-expected growth in the first quarter and stalling property growth in most regions, combined with lower interest rates makes it all the more surprising that there has been a wave of money entering the market via new lenders. We believe around three quarters are fintech lenders, many of which are backed by private equity, while the rest are new alternate lenders.
This in itself is not an issue. The problem is that very few of these companies are headed up by bankers, and even fewer of them have experienced operating in markets where it can take up to five years to recoup money from defaulters.
This is especially the case now that we have a very borrower-friendly legal process.
And it is here that we must pause and caution both the new lenders as well as the businesses and consumers borrowing from them.
Even though many of the lenders are focused on large volumes of small business loans and they may have factored a high default rate into their own business models, they will rely on high fees (rather than interest rates) to ensure their profitability in this unregulated space.
Should things not go according to plan, these (often inexperienced) lenders may find themselves in trouble. This will spill over to their customers, placing them at significant risk.
However, just as the customer must remember caveat emptor (buyer beware), so too should the new lenders practise caveat creditor (lender beware), or we may soon find our already unstable market dealing with many more companies shutting up shop.
Gary Palmer is the chief executive of Paragon Lending Solutions.