During Q2 of 2020, extended lockdowns caused by Covid-19 put pressure on businesses which affected unemployment rates and household wealth. Ultimately, this led to borrowers struggling to make loan repayments, and the introduction of repayment moratoria in many countries further aggravated the situation. As a result, the ratio of non-performing loans increased for alternative lenders.
However, lending companies have since reduced the pandemic’s impact on their loan portfolios by adjusting lending operations. Data on Mintos shows the overall ratio of non-performing loans has been declining, reverting to pre-Covid-19 levels. As loan portfolios become more resilient, these improvements signal lower risk for investors than previously challenging months.
Key takeaways
- The alternative lending market experienced unprecedented levels of pressure over the first half of 2020, leading to an increased ratio of non-performing loans
- Lending companies, however, adapted to the market and adjusted lending operations
- Loan default rates have since reverted to pre-Covid-19 levels, and the ratio of non-performing loans continues to decline, signalling lower risk for investors
How Covid-19 affected the alternative lending market
Over the first half of 2020, global events created unprecedented levels of uncertainty, especially as lockdowns continued. In response to this uncertainty, liquidity dried up across the financial market. The University of Cambridge’s FinTech Market study showed that firms reported a 20% increase in liquidity risk (year-on-year, H1 2020)1. These effects flowed through to the alternative lending market, resulting in volatile consumer loan portfolios and increased non-performing loan ratios.
Decreased household wealth, increased unemployment, and payment moratoria were key to the increased volatility in the alternative lending market. Globally, over a third of digital lending companies stopped issuing new loans, reporting an estimated 6% decrease in loans issued and a 13% increase in arrears / late payments (year-on-year, H1 2020)1. Europe, however, performed relatively well all things considered, with a modest 3% increase in loan defaults and an 8% increase in arrears / late payments1.
The extent to which individual lending companies were affected by the pandemic varied by country and region. Lockdown stringency and unemployment rates differed depending on specific governments and their stimulus programs. For example, digital lending companies from countries with higher lockdown stringency reported more loan defaults than countries with lower lockdown stringency (14% vs. 9%, H1 2020)1.
However, since this period, most lending companies have implemented various measures to cushion the pandemic’s effects on their loan portfolios. In 2020, over 50% of digital lending companies made changes to their lending criteria and introduced payment eases1. The changes in lending criteria have since been successful in lowering the share of non-performing loans.
In addition, fiscal support for borrowers has been solid in developed markets. Across countries of lending companies on Mintos, governments have provided levels of support that far exceed the response of the Global Financial Crisis, with packages ranging upwards of 13% of total GDP2. All of these measures are helping to protect jobs and assist borrowers in staying afloat, reducing the pressure on household financial situations.
Loans performance on Mintos showing positive signs of recovery
Over the first half of 2020, it’s clear that the effects of the pandemic impacted loan performance on Mintos. The best way to evaluate the impact is to look at the vintage month of the loans. This refers to the month that the loan was issued to the borrower. Then for each vintage month, we look at the non-performing loan ratio.
What we use to represent the non-performing loan ratio is the percentage of loans on Mintos that are delayed more than 60 days in repayment and are bought back by lending companies under the existing buyback obligation3. This serves as a valuable metric for the alternative lending market in general and loans on Mintos for eventual loan default.
Lending companies were issuing loans as usual up until Mar – Apr 2020. However, as soon as the effects of the pandemic became apparent, they cut back on issuing loans to new customers and extended a large proportion of loans to help borrowers cope with the disruption. But as borrowers still faced difficulties with loan repayments, loan defaults spiked, and the non-performing loan ratio increased.
Loans issued immediately before or after the pandemic’s start (without full knowledge of the pandemic’s effects) in Feb – Apr 2020 period were the most affected. For loans issued in Mar 2020, the ratio (across all loan types) of loans going into 60-day buy-back increased to 22%. The most significant increases were from the short-term and personal loans, representing a large portion of the loan portfolio on Mintos.
From this point on, to better manage liquidity and lower the non-performing loan ratio, lending companies continued to reduce loan issuance and tightened lending criteria. The stricter lending criteria lead to lending companies issuing loans to higher-quality borrowers who are less likely to default on loan repayments. As a result, for loans issued in Dec 2020, the ratio (across all loan types) of loans going into 60-day buy-back decreased to 10%. This rate represents pre-Covid-19 levels, suggesting the efforts of lending companies to reduce risk were successful.
We’ve since seen further signs of recovery in the alternative lending market as lending companies and investors alike regain confidence. Between Oct 2020 – Mar 2021, the number of funded loans grew by 44%, and in the first quarter of 2021 alone, this number increased by 26%. Increased investor demand is driving this more consistent supply of new loans as confidence continues to rise for investing in loans. In response, many lending companies plan to further increase their loan supply on Mintos over the coming months.
The Covid-19 pandemic tested the alternative lending market, but lending companies have adjusted to this new environment – as evidenced by the ratio of non-performing loans reverting to pre-Covid-19 levels. The quality and resilience of loan portfolios continue to improve due to stricter lending criteria while demand for new loans increases. These market improvements are encouraging and suggest that risks for investing in loans are now lower compared to the first half of 2020.
Footnotes:
- University of Cambridge Judge Business School “Global COVID-19 FinTech Market Rapid Assessment Study” https://www.jbs.cam.ac.uk/faculty-research/centres/alternative-finance/publications/2020-global-covid-19-fintech-market-rapid-assessment-study
- International Monetary Fund “Policy Responses to Covid-19”
https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19 - 98% of loans on Mintos come with a buyback obligation, which refers to the obligation of the lending company to buy back the loan claim and pay the investor principal and interest if the borrower is more than 60 days delayed in making repayments
