Why does default happen?
Late loan repayments and loan defaults are the risks of MSME Financing Platform alternative investments, especially in the world of MSME lending.
The market can be unpredictable. A small business may face lower revenue, struggle with late invoices, and face other factors outside the borrower’s control. Such situations can cause late repayments or even default.
Because of the risks, interests rates from MSME Financing Platform activities are higher than average. But don’t let default risk prevent you from lending. It is imperative to keep your portfolio well-diversified.
What are defaults?
A loan is considered defaulted if its borrower has not paid an installment for more than 90 days past repayment due date
How could defaults occur?
The businesses we provide loans to are considered micro, small, and medium-sized enterprises, making their business conditions more sensitive to what is happening in the market compared to larger corporations. For example, if a client of a small-business borrower is late in paying its invoices, borrower cash flow would be negatively impacted. This doesn’t mean the borrower isn’t willing to repay his loan. It simply means one factor or more has prevented the borrower from submitting repayments.
How does Modalku handle defaults?
We maintain good relations with each borrower. In addition, our collection team is always ready to execute the collection process so repayments can run smoothly.
Lenders can view the results of our collection process on the “Notes” section of the “Portfolio” menu, at the right side of loan ID/code. You can view “Notes” of a loan when a borrower is more than 15 days late in submitting a repayment.
If you are using the Modalku app, select the “Portfolio” menu. Then click on the “Defaulted” tab. Choose the loan ID/code you would like to view and review “View Repayment Notes”.
What is the default rate of Modalku right now?
Our default rate is shown on our statistics page.
What can I do to minimize default risk in MSME Financing Platform?
Diversify, diversify, and diversify. Do not lend a large amount of funds into a single loan, especially if you aren’t willing to lose the amount of funds. Divide a larger amount of funding into as many loans that fit your preferences. By diversifying your loans, even if a loan defaults, you would still receive positive interests from MSME Financing Platform as other MSMEs continue to submit loan repayments. All borrower applicants are strictly assessed by our credit team, but unexpected market changes can cause unwanted results.
It is important for lenders to be aware of the risks related to MSME Financing Platform and how to minimize such risks.
Example: You have Rp 10 million of funds on a MSME Financing Platform platform. To maximize diversification, you can allocate Rp 100.000,- per each loan provided on the Modalku platform. If you do this, you will have a total portfolio of 100 loans with different risk profiles.