Lending Works is introducing a period of negative interest rates, so that it can channel more money into its provision fund to mitigate anticipated higher credit losses.
The peer-to-peer consumer lending platform said that its latest assessment of expected bad debts for active loans has increased by approximately 30 per cent, leading it to adjust lender rates.
However, it said that the annual returns received by every retail investor over the lifetime of their investment are expected to remain positive, with no capital losses anticipated as a result of the pandemic.
“While interest rates are negative, the monthly repayments made to retail investors will decrease further with the reduction being entirely diverted to the Lending Works Shield,” the firm said in a third-quarter update on its website.
The period of negative interest rates will be phased, Lending Works said, being more severe for three months, then easing after that.
Expected annual retail investor returns have dropped since the platform’s second quarter update.
Average annual returns on past cohorts (2014-2019) have reduced from 4.6 per cent to 4.2 per cent for growth investments and from 3.8 per cent to 3.6 per cent for its flexible account.
For the 2020 cohort, average annual returns fell from 4.2 per cent to 3.6 per cent for growth and from three per cent to 2.6 per cent for flexible investments.
And the platform said expected annual losses on the active portfolio increased from 3.8 per cent in the second quarter to 4.4 per cent in the third quarter.
Lending Works said that around 90 per cent of its borrowers had resumed monthly payments by the end of September, while two per cent were still on payment deferral.
The platform also noted “performance deterioration” within a group of customers that started to miss loan repayments but did not engage with our collections team and did not request a payment deferral. “We believe many of these customers will go on to default on their loans,” it said.
Lending Works adjusted its terms in November 2019, to reduce interest rates and put more money into its Shield contingency fund to make the platform more resilient.
“The changes we made in late 2019 have resulted in a more resilient Lending Works Shield,” the firm said. “While we could not have anticipated that there would be a global pandemic, we continue to believe that the ability to use variable interest rates to account for variations in the performance of the portfolio performance protects investors and the stability of returns over the lifetime of their investments.”
It said in the third-quarter update that it hopes to resume new lending shortly with a tightened creditworthiness and affordability criteria.