What do you do when you encounter a default note?


  • Funding Societies

    Hey crowdfunders,

    Creating this thread to crowd-source advice & strategies on what to do, when you encounter a defaulted loan in your portfolio. As defaults are inevitable in a lending business, I think its important that every investor know how to handle this situation.

    Please share your thought process in such a scenario, how to stay calm and focus on the next steps, and any other advice you would give to your fellow investors.

    #powerOfCommunity



  • What I do is...

    1. Contact the platform support (in case of FS I would post here, as it has happened for the couple defaults so far) to get more information on their loan recovery strategy, if any.

    2. I go back and read the Factsheet, looking for weaknesses in the business. I try to see what might have led to a default to not to lend to the same kind of business again (e.g: was it too leveraged? Was it too cash flow strapped? Was it playing in a very competitive industry?) This, of course, is easier said than done.

    3. I calculate in an Excel how many successful loans will it take to recoup the loss on that loan, and forecast what's going to be the total return in that platform form the months to come. E.g my current annual return in FS is 12.8%, so let's say a 200 RM loan defaulted would take me 6 months of returns to recover the money, and at that moment the annual return would have dropped to 10% (dummy figures).


  • Funding Societies

    @antoniomc27 thanks for the thoughtful response. Appreciate your quick reply on the thread.

    Just curious, have you ever used the learnings from a defaulted loan's factsheet & made a decision to not invest in a business under certain conditions?

    For point 3, after you calculate the necessary figures to recover the loss, do you double down in the platform/other p2p platforms and invest more to achieve the recovery?



  • @vamsi7

    I have experienced only 2 defaults to date in P2P.

    One was in Crowdo, and I understood from the factsheet that the business was not stable enough (only 2 years of operations), that they were relying too much on just a handful of customers, and that a collateral on the machines and other assets is not so great as it might sounds, as now we are set for a long loan recovery process, since they will have to liquidate those assets and spend quite a long time in courts. In Crowdo, I did not double down my investment butI still trust the platform so I will not withdraw my investment.

    In Estateguru I suffered a default and I did not learn anything interesting from the factsheet, but the recovery process was so prompt and good (the platform owners are serious and sell the property straightaway, distruibuting the proceeds quickly) that I even invested more on the platform.



  • @antoniomc27

    This would be what I will do as well.

    I add in one more PD (%) with my total loans amount to provide a provision for any chances of default.

    example pd is 1% and a total loan amount of say 10,000, i would provide a provision of around $100 in case of defaults.

    May not be the most accurate but at least I have a rough gauge how much i need to provide for write off.



  • what do I do ? Nothing , just wait for the platform to solve the situation.
    In the meantime , I stop topping up.



  • I don’t worry. I would even write it off immediately. It’s part and parcel of the business.... A numbers game where interest from your portfolio will be able to cover for the loss and still make money for you. That is, if you are well diversified and if you are in for the long run.



  • Honestly, nothing much we can do to that particular defaulted note. Only can learn from mistakes. And probably just be cooperative when platform plans to perform recovery steps.


  • Funding Societies

    Thanks for your views guys!

    @antoniomc27 Do you contribute to every loan recovery ? or are there certain conditions under which you choose which ones to contribute to? @josephyiong curious to know your views on this as well.

    @jomni very salient points. Hoping your post can help everyone achieve this clarity and not worry over defaults!



  • @vamsi7 yes. Just to reiterate. In P2P, you make a bet on a certain sector of SME borrowers. Like a market following stock index, You ride the ups and downs of the economic cycle. Of course you only get this effect when fully diversified.

    This mindset is less stressful than individually watching each loan’s performance. That said, there are people who want to beat the market. But are non-Bankers with very little info capable of doing it?



  • @jomni said in What do you do when you encounter a default note?:

    @vamsi7 yes. Just to reiterate. In P2P, you make a bet on a certain sector of SME borrowers. Like a market following stock index, You ride the ups and downs of the economic cycle. Of course you only get this effect when fully diversified.

    This mindset is less stressful than individually watching each loan’s performance. That said, there are people who want to beat the market. But are non-Bankers with very little info capable of doing it?

    Solid explanation, very much agreed.


 

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