Our Co-Founder, Kelvin Teo, held an Ask Me Anything session on our community forum, Crowdfund Talks and we were heartened to see such an overwhelming response! For those who have missed the opportunity to get your burning questions answered by Kelvin, we have compiled some of the interesting and recurring questions below.
On Peer-to-Peer (P2P) Lending industry
What can we learn from China on its P2P Lending issues?
We kind of expected the collapse of the P2P Lending industry in China. We wanted to avoid it in Southeast Asia (SEA), and hence in an interview with Business Times in 2016, we warned of over-heating and the resulting negative competition which would kill the market.
Several key lessons:
- Timely and sensible regulations are important. Regulators in China only started regulating 10 years later since the 1st P2P Lending platform started in 2006. Fortunately, regulators in Southeast Asia have the hindsight benefit of regulating early.
- Like driving, safety is more important than speed. With cut-throat competition, many platforms in China (and to an extent SEA) took the ‘go big or go home’ mentality and gave out too many loans that they shouldn’t. Once default skyrockets and credibility is lost, the trust is hard to earn back and thus results in the current ‘cash run’ in China (similar effect as a bank run).
- It may be my personal bias, but I see SME financing as productive loans which are impactful to societies. This is partly why we call ourselves “Funding Societies | Modalku”. Most platforms in China focus on payday/ consumer financing (often predatory), resulting in loss of public trust.
Would it be reasonable to say that SMEs will likely go to P2P Lending as a last resort (excluding moneylenders) or for an emergency, e.g. over-leveraged, rejected by banks, cash flow stuck, lack of assets/equity/securities, etc?
We thought so initially too but it turns out that it is often not. In addition to the reasons that you have stated (i.e., unable to get loans elsewhere), we find that SMEs also come to us for:
- Top-up above collateralized bank loan
- Speed and convenience
- Early relationship building with us as they worry that banks may pull back the credit line one day.
I’m very new in P2P Lending platforms and I don’t understand the difference between simple interest rate and effective interest rate. Can you kindly enlighten me about it?
This is a very good question. You’re not alone; I’ve seen many folks who don’t understand. To put it simply, simple interest rates do not assume compounding, while effective interest rates do. If I may illustrate with an example, for an S$ 100 investment of 10% interest for 1 year with equal monthly repayment:
If the 10% is simple interest, you’d get S$100 *(1 + 10%) = S$ 110 over the year.
If the 10% is effective interest, the convention assumes you’d re-invest each monthly repayment at the same 10% rate, hence the total dollar value you receive over the year from that investment is actually less than S$110.
We usually talk about both because both conventions are correct, but different folks are used to different conventions. One advice is to follow the cash (i.e., how frequent/ much the repayment), as percentages can at times be confusing/ misleading.
On Funding Societies
How much does Funding Societies take in each loan to execute the “skin-in-game”?
We used to do a lot. But we currently invest the minimum for each loan like all other investors, as we receive feedback that we are ‘crowding out the crowd’. Nevertheless, the principle of only putting up loans that we would invest in remains the same.
How does Funding Societies calculate the default rate?
Loans that exceed 60 days past due (for invoice financing) or 90 days past due (for unsecured term loan) divided by loans disbursed to-date (because our loans are all short-term, less than 12 months, unlike in banks). If it helps, we’ve given out about S$300M loans with the majority of them repaid, and have lost about S$3M in default.
How does Funding Societies maintain such a low default rate?
In all candour, it’s a lot of working hard and working smart. We also made the conscious decision that we’d rather have false negatives (loans we should have approved but didn’t) than false positives (loans that we shouldn’t have approved but we did which then results as defaults) because trust and reputation are more important than growth. As Benjamin Graham said, rule No. 1 of investment is to preserve capital and then only try to make it grow.
In the future, will it be possible to invest in loans from Singapore, Malaysia and Indonesia from the same Funding Societies’ platform and maybe even using a single wallet (where conversions could be done on Funding Societies’ end)?
Currently, investors from our Malaysia, Indonesia and Singapore platforms can cross-invest by informing us to set up your account in the relevant local platform, but we still can’t do it from a single platform/wallet (and also can’t manage your forex risk yet).
At some point, we do aim to have a unified platform and wallet. But in all candour, this is unlikely to happen in the near future, due to other competing priorities which will enable us to serve investors like you a lot better.
What precautions and due diligence measures does Funding Societies take when multiple loans are taken up by the same SME owner?
As a principle, we’re strongly against loan stacking i.e., giving out a 2nd loan to enable an SME to repay their 1st loan, as it is risky like a house of cards. For SMEs with multiple loans from us, we assess it upfront, determine the overall eligible loan amount, and space them out in multiple smaller loans based on the SMEs’ needs (and to an extent minimise total exposure and risk).
On Funding Societies’ culture
When you think of the best employees who have worked for you, what makes them stand out in your mind?
We encourage team members in Funding Societies | Modalku to write a ‘user manual’ on how to better work with them.
Here’s what I wrote on “how to earn an extra gold star from me”:
- Grow as a person (not physical size), as human change is one of the most beautiful miracles.
- Go above and beyond, as there is no glory if one is merely doing what he/she is supposed to do.
- Make things happen, as moving from 0 to 1 is one of the hardest things to do.
What annoys you most when someone reports to you?
Similarly, this is under “what drives me nuts” when working with me:
- Make claims without facts, as words have power. We should use it responsibly.
- Shifting winds, saying “A” but do “B”, or say “A” to me but “B” to another person.
- See acts of unfairness – “don’t do unto others what you don’t want others to do unto you.”
On Kelvin’s top picks for books
If you have to recommend one book for learning about investing and personal finance, what would it be?
The book I’d recommend is “The Intelligent Investor” by Benjamin Graham. It’s a classic but most importantly it’s aligned with my values of investing for value and long-term.
What 3 books would you recommend? It could be fiction or nonfiction.
Radical Candor by Kim Scott – I believe it’s how we should treat each other.
Powerful by Patty McCord – I admire Netflix’s culture which continuously transforming itself.
Tuesdays with Morrie by Mitch Albom – Yes, super old book, but it puts life into perspective.
We would like to thank the following users for their questions: @shaun, @jonhan, @googleging, @tt, @usws, @funfunding, @annieway96, @JC18.
Head over to Crowdfund Talks now if you are interested to check out Kelvin’s responses to the other great questions that he has received.
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