The effect of Covid-19 on the digital lending market
Covid-19 crisis has increased the need for digital lending platforms and their products more than ever. Yet, most platforms are facing a major lack of funding.
The Covid-19 pandemic and its subsequent lockdowns have confronted many people with the challenges of raising funds – fast, and without personal contact. While optimally positioned to supply financing in the form of digital credit, the pandemic has had adverse effects on alternative lending platforms.
In Indonesia, one of the largest markets for digital lending with 7.4bn USD in distributed loans as of June 2020, credit demand is surging – with the regulatory authority reporting a 166% year on year increase in requested loan volume. Investment appetite registered by Singapore-based SME lending platform Validus is now surging above pre-crisis level as investors realize the benefits of digital lending, including its low correlation to public markets in times of economic uncertainty. Digital lending platforms across the globe have alleviated credit financing for businesses and SMEs to help secure the liquidity needed to mitigate the effects of the sudden economic downturn.
Simultaneously, balancing demand with funding supply imposes a challenge to many bilateral marketplace models. Lending Club one of the largest digital lenders globally, experienced a 90% yoy drop in loan origination volumes in Q2 2020. The pandemic also threw monthly loan origination levels in April and May 2020 of Mintos, the largest loan origination aggregator, back to 2017-levels.
The Frankfurt-based SME credit platform Creditshelf was highly affected by the pandemic, leading to a decrease in the loan volume by 31% in the first quarter of 2020 compared to the same quarter of the previous year and almost by 70% from the last quarter of 2019. Even though the requested credit volume rose by 60%, only 2.3% of the loans could be granted. Meanwhile, loans distributed by the Finnish Fellow Finance platform have been providing positive investment returns, which has even improved from the same period last year. They facilitated 10.7m USD of loans in June and the number of investors has been rising since the beginning of 2020.
Similarly to loan volumes and investment returns, default rates were also adversely affected by the pandemic, increasing both in Europe and Southeast Asia. Among European digital lending platforms, default rates vary between 3%-6%, where the highest ones were captured in the past two months. Meanwhile, in Southeast Asia, they slightly increased in comparison with the last quarter of 2019 ranging between 13%-16% and reached their peak in March.
While the pandemic will undoubtedly drive out unsustainable lending businesses in the long run, the necessity to further the digital lending market is obvious. Direct lending has long offered attractive risk-adjusted returns compared to traditional investments, and due to its low correlation to the public bond and equity makers, now might be an ideal time to begin exploring how to invest in it at a scale – and help businesses continue distributing necessary funds to their borrowers.
