mark123
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Post by mark123 on Sept 21, 2016 12:50:44 GMT
Have I understood the provision fund page correctly?
The provision fund is currently £17m with anticipated bad debts nearly £18m.
There is also contracted future income of nearly £6m.
This gives a coverage ratio of nearly 1.0 (based on fund today) or 1.3 (based on fund today plus future income).
One year ago, the figures were provision of £16m against anticipated bad debts of £10m giving a coverage ratio of 1.6.
Is this right, over the last year:
1. The coverage ratio has dropped from 1.6 to 1.3 (based on cash plus future income)? 2. The coverage ratio has dropped from 1.6 to 1.0 (based on cash)? 3. In that time, the expected bad debt ratio has increased from <2.2% to <2.8%?
As new loans are written with provision contributions over the life of the loan, the cash in the provision fund will presumably drop further below the anticipated debt.
Which leads to my final question: is it mathematically (im)probable that expected bad debts crystallise faster than the expected future income (presumably spread up to 5 years depending on the length of the loan)?
Looking forward to clarification, Thanks, Mark
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Post by westonkevRS on Sept 21, 2016 18:04:21 GMT
Hi mark123To answer your last question first, anything is possible. Lending with P2P provides no FSCS protection, and the Provision Fund provides no guarantees. We can only estimate the bad debt based on the data and experience we have. So yes, bas debts could crystallize at a faster rate than the future income is gained. That said, the portfolio is monitored daily and changes are agreed monthly on risk parameters, pricing and portfolio management. The recent changes to Provision Fund reporting is here: www.ratesetter.com/blog/article/implementing_coverage_ratio_reporting_changesI can't really go into any more detail than this, not least because personally I'm not close enough to the process. My expertise is consumer retail lending, and our portfolio now includes real estatte lending, wholesale to lending business, business finance, mobile phones, etc. It is all of these sub portfolios that go into the final expected loss calculations. I would say however that the biggest change (and increase) to expected loss calculations was to business finance. As we perform more lending we gain more data and experience, and also take note of the wider market performance. As a result this did result in higher expected loss calculations, although I'd like to think this included a fair element if prudence... (good chance to throw in the kitchen sink....). Kevin.
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mark123
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Post by mark123 on Sept 21, 2016 21:37:09 GMT
Thanks Kevin
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Post by propman on Sept 22, 2016 15:42:02 GMT
Have I understood the provision fund page correctly? The provision fund is currently £17m with anticipated bad debts nearly £18m. There is also contracted future income of nearly £6m. This gives a coverage ratio of nearly 1.0 (based on fund today) or 1.3 (based on fund today plus future income). One year ago, the figures were provision of £16m against anticipated bad debts of £10m giving a coverage ratio of 1.6. Is this right, over the last year: 1. The coverage ratio has dropped from 1.6 to 1.3 (based on cash plus future income)? 2. The coverage ratio has dropped from 1.6 to 1.0 (based on cash)? 3. In that time, the expected bad debt ratio has increased from <2.2% to <2.8%? As new loans are written with provision contributions over the life of the loan, the cash in the provision fund will presumably drop further below the anticipated debt. Which leads to my final question: is it mathematically (im)probable that expected bad debts crystallise faster than the expected future income (presumably spread up to 5 years depending on the length of the loan)? Looking forward to clarification, Thanks, Mark I don't think you should see the change as a current issue. The reality is that the bad debts that have been suffered on the loans they had written a year ago have been higher than the 2.8% now predicted and much higher than the 2.2% predicted at that time. In fact the outturn is close to the amount due to the PF. The bad debt estimate is an extrapolation assuming that each category of loan performs in the same way as those originated in the year from 30-18 months ago. As a result, we can expect to see the bad debt estimate increase for the next 2 months as periods of low default are replaced with ones with higher default.
As to your final question, RS has the ability to increase the charges on current loan originations to meet the payments for earlier defaults. As a result, funds would only be unavailable in PF if the rate of origination was too slow to achieve this. Hence in my opinion one of the large risks is a drop in confidence n RS reducing the funds lenders are prepared to place with them at the rate that allows them to compete and make the necessary contributions into the PF.
- PM
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pip
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Post by pip on Sept 23, 2016 22:07:27 GMT
My continued running down of my account continues. I have nothing more to add....
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Post by westonkevRS on Sept 24, 2016 5:47:50 GMT
My continued running down of my account continues. I have nothing more to add.... That's a shame, especially from a longer term lender and one we met at the drinks evening. Hopefully your mug is still in fine form.... But just to clarify, this is expected to happen. As we've well signposted in order to make the platform more robust based on recurring revenues (both to RMM Ltd and the Provision Fund), this will reduce up-front payments into the fund. So conversely the lifetime contracted Provision Fund has increased to £5,998,034, and this already has a haircut based on early redemptions and bad debt. But that's transparency for you, and people are free to make their own judgements. Just please don't go chasing waterfalls (also know as 12% returns...), without your eyes wide open to the risks. Kevin.
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dermot
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Post by dermot on Sept 26, 2016 9:45:04 GMT
Hi mark123 To answer your last question first, anything is possible. Lending with P2P provides no FSCS protection, and the Provision Fund provides no guarantees. We can only estimate the bad debt based on the data and experience we have. So yes, bas debts could crystallize at a faster rate than the future income is gained. That said, the portfolio is monitored daily and changes are agreed monthly on risk parameters, pricing and portfolio management. The recent changes to Provision Fund reporting is here: www.ratesetter.com/blog/article/implementing_coverage_ratio_reporting_changesI can't really go into any more detail than this, not least because personally I'm not close enough to the process. My expertise is consumer retail lending, and our portfolio now includes real estatte lending, wholesale to lending business, business finance, mobile phones, etc. It is all of these sub portfolios that go into the final expected loss calculations. I would say however that the biggest change (and increase) to expected loss calculations was to business finance. As we perform more lending we gain more data and experience, and also take note of the wider market performance. As a result this did result in higher expected loss calculations, although I'd like to think this included a fair element if prudence... (good chance to throw in the kitchen sink....). Kevin. Interesting, thanks. Given that you have assessed some parts of the loan portfolio as having a higher default risk, do you levy a variable rate contribution to the provision fund dependent on risk, or do you just assess the interest rate against expected risk and take a flat rate contribution from that? This may be verging into business confidential territory of course, I merely ask out of interest. I've started to slowly draw down from RS, but that is simply because retirement time is now very much at hand - well, dropping down to only one day per week. That said, I'll still be putting the occasional lump sum back in as other things mature, so long as 5 year remains above 5% (and I am sorry to see the demise of 3 year ...) - as I like the ease with which RS generates a bit of supplementation to my pensions/reduced salary and just transfers the dosh across on schedule. Of course the introduction of a tax free ISA wrapper would increase my enthusiasm quite markedly ...
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markr
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Post by markr on Sept 26, 2016 15:53:38 GMT
As to your final question, RS has the ability to increase the charges on current loan originations to meet the payments for earlier defaults.
Could this lead to a vicious circle, though? Defaults are higher than expected, RS increases PF contribution charges, rates offered to borrowers (and hence "riskiness" of borrower) rise, even more defaults, etc.
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am
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Post by am on Sept 26, 2016 17:05:26 GMT
If I understand and recall correctly the provision fund buys all delinquent loans, including those that those that were late (by more than a specified period?) on a single payment. Thus the provision fund has assets in excess of its cash consisting of performing loans (those that have caught up with late payments and are paying back normally), late loans and defaulted loans. We don't know what proportion of performing loans will continue as such, what proportion of late loans will become performing loans or defaulted loans, and what the recovery levels from defaulted loans are, but if I understand correctly the value of the provision fund is uncertain, but somewhat greater than its headline value.
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Post by westonkevRS on Sept 26, 2016 17:40:09 GMT
Interesting, thanks. Given that you have assessed some parts of the loan portfolio as having a higher default risk, do you levy a variable rate contribution to the provision fund dependent on risk, or do you just assess the interest rate against expected risk and take a flat rate contribution from that? Our approach to risk pricing is broadly standard in financial services, so I won't be giving any secrets away.... When every loan is written of any type, albeit consumer or business, the risk of that loan determines the Provision Fund contributions (both up front and over term). Our views on risk change over time, e.g. we might decide that 1-year loans as a segment perform well and hence reduce the charges on future loans. Some segments will pay more service fees depending on risk, only because we might have to spend more resource on Collections for that type of loan, e.g. mobile phones. Once a loan is written though, we won't change the pricing over time for that loan. For example we won't decide that more can go to RMM Ltd if we think the risk of that loan has improved as it pays through time. I hope that helps, Kevin.
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Post by westonkevRS on Sept 26, 2016 17:45:31 GMT
As to your final question, RS has the ability to increase the charges on current loan originations to meet the payments for earlier defaults.
Could this lead to a vicious circle, though? Defaults are higher than expected, RS increases PF contribution charges, rates offered to borrowers (and hence "riskiness" of borrower) rise, even more defaults, etc. This is true, a real risk. It depends on the competitive nature of the loan source, it may well be that to increase the credit fees we have to reduce the RMM income. If we are able to, we will often increase the APR to accommodate the risk. However if this goes to far, we will simply stop lending through that source/channel. Otherwise the catch 22 situation does occur, in my experience default because of the APR likelihood is increased irrespective of the borrower risk quality. Good customers or ones with tight affordability will simply not pay if the loan is a bad deal or they can't afford to. Kevin.
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Post by westonkevRS on Sept 26, 2016 17:50:54 GMT
If I understand and recall correctly the provision fund buys all delinquent loans, including those that those that were late (by more than a specified period?) on a single payment. Thus the provision fund has assets in excess of its cash consisting of performing loans (those that have caught up with late payments and are paying back normally), late loans and defaulted loans. We don't know what proportion of performing loans will continue as such, what proportion of late loans will become performing loans or defaulted loans, and what the recovery levels from defaulted loans are, but if I understand correctly the value of the provision fund is uncertain, but somewhat greater than its headline value. This is absolutely true. Any missed payments is covered by the PF on that date, i.e. the lenders get every payment on exactly the date they expect. They just don't realise it came from the PF rather than the lender. The distressed assets owned by the Provision Fund are actually greater now than the cash value reported. This is a large unseen asset, although obviously not a clean asset. However it already generates around £100k per month in collections payments that go to the PF, and we may perform a debt sale shortly to generate more payments. This all goes back to the fund. It is worth noting that theese assets are not all bad defaults, it includes many loans on new payment terms (where we expect to obtain all the cash) and deceased. Kevin.
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dermot
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Post by dermot on Sept 27, 2016 13:13:55 GMT
Our approach to risk pricing is broadly standard in financial services, so I won't be giving any secrets away.... Yep, all very helpful, ta, particularly the potential recovery costs for different types of loans. Showing my lack of knowledge here, are loans for mobile phones a very big market segment? I'd assumed that most phones were supplied "free" (or at least heavily discounted) on a two or more year contract. My recent acquisition of a new (exploding version, now waiting for a replacement) Galaxy Note 7 cost me 49 quid, I think, when I renewed my existing contract.
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markr
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Post by markr on Sept 27, 2016 14:09:01 GMT
This is absolutely true. Any missed payments is covered by the PF on that date, i.e. the lenders get every payment on exactly the date they expect. They just don't realise it came from the PF rather than the lender. Presumably, though, loans aren't fully repaid to lenders and taken in to the PF as soon as they are a day late though? There must come a point when a loan crosses the line between shabby-chic and proper distressed, is that a fixed threshold (N missed payments? bankrupt borrower?) or something decided on a case by case basis? I guess once a loan really has no chance of getting back on track, the PF may as well repay the lenders and save the future interest. But, paying back too many loans that would get back on time just depletes the PF and annoys lenders.
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toffeeboy
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Post by toffeeboy on Sept 27, 2016 14:58:23 GMT
This is absolutely true. Any missed payments is covered by the PF on that date, i.e. the lenders get every payment on exactly the date they expect. They just don't realise it came from the PF rather than the lender. Presumably, though, loans aren't fully repaid to lenders and taken in to the PF as soon as they are a day late though? There must come a point when a loan crosses the line between shabby-chic and proper distressed, is that a fixed threshold (N missed payments? bankrupt borrower?) or something decided on a case by case basis? I guess once a loan really has no chance of getting back on track, the PF may as well repay the lenders and save the future interest. But, paying back too many loans that would get back on time just depletes the PF and annoys lenders. My understanding is that the time period that you are looking for is four months default whether they are making payment or not. Basically the PF covers the monthly payment if none is made from the borrower for four months, when it reaches the 4 month default then the PF buys the remainder of the loan and you get an email to say that the loan has been settled early and the money has been placed wherever your instructions say to place repaid monies.
For example if they are paying 1/2 the required payment then the PF will make up the other half each month but when after eight months then the loan will be 4 months behind and the loan will be settled from the PF as mentioned, the loan will still be repaid but now it is owned by the PF and all money will go to them. The loans that are purchased by the PF don't show as a balance so the PF is actually worth more than the representative balance as not all loans are not going to get collected.
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