Kuflink predicts rise in defaults
Kuflink has predicted a rise in defaults across the peer-to-peer lending sector and financial services industry, as interest rates continue to rise and the cost of doing business increases.
The property lender is particularly aware of the issues faced by property developers, who are dealing with higher development and operational costs, alongside higher capital costs and lower valuations.
These concerns have led the platform to implement some new risk management processes, designed to identify default risk at the earliest possible stage and maintain Kuflink’s record of zero investor losses.
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“Our criteria is tailored to our risk appetite, and our risk appetite is always to mitigate risk by protecting the money invested by our investors who have incurred zero losses to date,” says Hiran Patel (pictured), chief risk officer at Kuflink.
“We are constantly reviewing external risks such as market conditions including the Bank of England rate rises and will consider all applications on their own merit, looking at property location, property type, suitable loan-to-value, property condition and the borrower’s exit strategy and whether it is feasible.
“Each loan application goes through a stringent underwriting process and in summary, the three key principles being reviewed for each loan are borrower, property and exit.”
Kuflink recently made a new addition to its tried-and-tested risk management approach.
Six weeks before a loan’s expiry date, a law firm that specialises in mortgage and debt recovery will make contact with the borrower to ensure that they are aware of the redemption process. This is also an opportunity to check in on the likelihood of the loan being repaid on time.
“This process has now gone live,” confirms Patel.
“Where extensions are being requested by borrowers, we are looking at these requests on a case-by-case basis subject to being provided with sufficient evidence showing an exit to repay our loan is in progress.”
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When a loan term is extended, investors will now receive a higher rate of interest, if the rate to the borrower is increased.
“The risk of default is with any lender and is not solely restricted to P2P,” explains Patel.
“But I believe that P2P remains an attractive option for investors as the loans are secured against property, and as an investor you are still achieving good rates of returns offered by Kuflink which in comparison is more than what is currently being offered by your typical high street lender who is a lot slower at increasing rates for savings products but very quick to increase the rates on lending products.”
Kuflink – along with most other P2P platforms and high street lenders – is expecting uncertain market conditions over the next year, not just within the alternative lending community but in the financial services sector as a whole.
“I think this is expected for all financial institutions that lend money to consumers,” Patel says. “The key to managing this will be down to the processes and criteria lenders have in place when a loan is being underwritten and then managed through to repayment and whether they are as agile as Kuflink in implementing changes quickly to adapt to the changing marketplace.
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“One of Kuflink’s key values is ‘transparency through open communication’ so it is very important to openly communicate to manage expectations for both borrowers and our investors.”
With further base rate rises predicted, Patel believes that all lenders should review their current processes and criteria to reflect their risk appetite, and consider carrying out a root cause analysis to identify any potential patterns that may lead to amendments in their lending criteria.
By taking a proactive approach to its own risk management processes, Kuflink aims to stay ahead of any issues so that it can maintain its impressive record despite economic turmoil.