Why loan on default may not means 100% principal wipeout and why is it not the end?



  • Hi all,
    For many of you out there, be it as an investor or is still on the lookout mode, there is this nagging concern, if a loan goes into default, does it means that it is not recoverable or that I will lose 100% of my principle?

    As an ex banker dealing with SME loans, I do have experience with dealing with a SME loan going into a default.

    In this case, we are looking at two questions here and I will address them separately. Let me address the easier one first

    Question 1

    If a loan default, will I lose 100% of my principle?

    Answer:

    It is very unlikely that you will lose 100% of your principals. Depending on the schedule of repayment, most of the loans monthly repay consider of P+I while some will pay interest until towards the end of the loan where they will return your principle.

    Unless the borrower start to default on its first repayment, it is not likely that you will lose 100% of your principal. Based on my experience, even for the most hard core defaulters, the probability of a default on first repayment is less than 1% even though we do still have cases of late repayment.

    In short, the further it default at its borrowing tenor, the higher will be the amount of your principal recovery even for those deferred principle payment.

    Question 2

    When a loan goes into default mode, is it non-recoverable?

    Answer:

    No, while it has a high chance of been a default loan, it does not means that it is definitely not recoverable. In the events of a few late payment, the principal agent (Could be the p2p platform or in some cases could be leading bank in syndication loans or the RM) will start to prompt the borrower to find out what are the reasons for their late payment.

    In some cases if it is a mismatching cash flow, the agent could change the repayment date to match the cash flow situation of the borrower.

    However if there are cases where the borrower actually struggle with the payment due to reasons such as unexpected dip in revenue, the agent could restructure the loan by either extending the tenor to lower the monthly payment or to change the month repayment schedule from monthly P+I to I only for a certain period of the tenor till the borrower is back on track.

    In the worse scenario where a default is imminent and it is a secure loan such as a personal guarantee, the principal agent could trigger the guarantee. If the loan is not a secure loan, the principal agent could proceed to take legal actions on the borrower.

    Do note that taking legal actions against the borrower will always be the last resort as it could bankrupt the borrower. Those with secure loans with the borrower has the priority queue to the borrower assets. Potentially the amount left for the non-secured loans may not be able to cover the loan fully. Such proceeding could take a long time and in the end, whatever that you get may not even be able to cover your legal fees.

    Based on my experience, 80% of the borrowers in default definition will be able to turn around and eventually pay off the loan while the 20% are the ones that will be irrecoverable.

    As long as you do your due diligence and diversify, you will not likely to loses sleep over defaults.



  • Thanks for sharing, I believe FS should have such experienced bankers like you in the team, and that would be absolutely great. Appreciate your contribution!



  • @josephyiong

    I am not from FS. Just like many here I am an investor.



  • @bendahara My job role is collection / recovery in a mall management company. I would love to join FS if they need a team to do recovery jobs, but in the meantime from an investor's point of view, I sincerely hope that they do not need recovery roles in the platform.. haha..


  • Funding Societies

    @Bendahara great post. Thanks for sharing.
    @josephyiong Haha, based on your posts, I can say you would be a great culture fit for FS. If there is anything suitable in the future, we will definitely let you know! :)



  • @josephyiong

    In corporate, usually the RM assigned with have the honor to talk to the borrowers on their late payment.

    It is not likely that we will have collection to go after them.


  • Funding Societies

    Hey everyone,

    Actually the approach that FS takes on collections / defaults is very similar to what @Bendahara had earlier described.

    Below is the order in which it's conducted:

    1. Understand what is causing delayed repayments
    2. Adjust the repayment dates
    3. Deploy in-house collections team
    4. Restructure the loan - if applicable
    5. Engage external debt collection agency - if applicable
    6. Take necessary legal action, but tactfully

    We much rather the company stays in operation than to wind up so that there is still a source of revenue that could potentially be used to make the repayments - albeit late.

    Remember that old saying, 'better late than never'? (:


  • Financial Bloggers

    In my experience, a statutory demand and creditor's petition work wonders, especially with regard to an ongoing concern :)



  • Also don’t forget to diversify. My rule of thumb is total value of loans and free funds / 20. That way, a default won’t hurt so much.



  • I recently got 1 repayment delayed for a week. Hopefully the company do well and repay back the loan.

    1. I still didn't get any representative from FS answering whether or not loans offered by FS are subordinated loans. Anyone?
      @fshappy


  • @bendahara Thank you for sharing your experience .... "Based on my experience, 80% of the borrowers in default definition will be able to turn around and eventually pay off the loan while the 20% are the ones that will be irrecoverable" this can change a lot to our experience of P2P investors.
    Do you have experience of what happens to SME loan during economical crisis time?
    Thank you



  • Insightful. However my personal experience with my line of work (construction) is that people like to drag payments, it is not like they don't have cash. They simply want to take advantage on the creditor, because as you have put it, the creditor tends to go soft on the debtor since they know that litigation is costly. This is a deep-rooted mindset which is very difficult to change. That's why I have my utmost respect to those who honour their (re)payments, and feel contempt towards those who don't.



  • Take note. Late payment of invoice is very prevalent in SG. As the previous post said, it’s the industry’s bad habit.

    https://atradius.sg/reports-and-services/payment-practices-barometer-singapore-2017.html



  • @peterpan

    Yes for those 20% there will be some dragging of repayment, negotiation for repackage of financing, getting secured assets, lawsuits and bankruptcy.

    Usually for lawsuits, most banks are very unwilling to do that especially if the facilities are not secured ones. For bankruptcy, in some situations, even with collateral, it may not benefit the bank.

    One of the banks that I work for got their hands on a boutique hotel tried to auction for 3 times over 8 months or so period only manage to get it out by last attempt. The cost incurred was a little high.

    There are times whereby a bank also dare not to do anything to the customers because they have influence on more than one of the clients that the banks are currenty having.

    Payment will come in slow and little in majority of the cases. Less than 1% of them truly need to write off over a few years period.


  • Funding Societies

    Thanks @Bendahara for taking the time to write this up. Will pin this thread to the top so people can find it easily.


  • Community Manager

    Hey @Bendahara! The marketing team at Funding Societies caught sight of this post and have republished it on the Funding Societies blog here!

    Here's a little thank you post for your valuable contribution ;)


 

Looks like your connection to Crowdfund Talks | A Community for P2P Lending & Alternative Investments was lost, please wait while we try to reconnect.