Never used ratesetter either as a borrower or an investor but given the current scenario, do you think that risk of investing will drastically increase on such platforms? I read that the company has existed for a few years and has 100% success rate of returning the pricipal to the investors along with interest amounts, unless I am missing any hidden numbers here. It seems that this is possible as the provision fund coverage ratio is 124% currently (which has worked so far), but it's calculated based on an assumption of a certain % of loans being the bad debt, which may not keep up in the current situation, me thinks. Some more details are here. I am just curious as their 2020 numbers aren't looking very different anywhere on their website except probably the increased interest rates of 1 month rolling loans (it probably denotes an increased demand of a short term loans?).
Keen to hear any insights from the users of any such platforms or the experts.
They post updates on their blog about the current risks that relate to expected credit losses.
Here is the latest update
https://www.ratesetter.com.au/blog/provision-fund-update-may…
The important thing to note is that since Covid-19 hit, the automated real-time provision ratio, fund buffer and expected credit losses reporting were paused and this is now done "Manually" every month.
At the start of covid-19 the 1-month rates were up to 9.5%+. I believe this is likely because investors were pulling their money out of the platform or not adding more money at the same velocity as before, especially in re-investments which is where a lot of the 1-month funding comes from. So the credit dried up so the rates skyrocketed (Investors and Borrowers set rates in a bid/ask mechanism). It's supply and demand at work. Ratesetter stepped in and capped the asking rates at 9.0%.
I am not a fan of the 1-month fund, the name is misleading. Your money can get assigned to anything from 6 months to 36 months and if you want to get it out earlier you have to wait either for new funds to replace it or to the end of that 6-36 month period.
The coverage ratio is the ratio of funds in the ( provision fund + expected inflows to provision fund ) / Estimated bad debt. Note that the denominator includes "Expected Inflows" ie money that doesn't yet exist in the provision fund yet is expected to add to it if people keep repaying.
Ratesetter says that they have strict lending criteria and that the behavior of Australian households is to pay down debt first before spending cash on other things. Having said that at the moment <4.9% of loans are now classed as bad debt and current provision fund coverage ratio of 1.2x is lower than what it was a year ago at maybe 1.6x.
The rates have been slowly decreasing since the early spike. Whether or not the rates represent the risk that is involved is up to the investor.