When not lecturing students on civil engineering, 33-year old Doddy Prayogo spends much of his downtime producing YouTube videos on how to become financially independent.
There are many like him, but Prayogo specialises in deep-dive reviews of peer-to-peer lending platforms based on his personal experience as a prolific lender who has disbursed roughly 2 billion rupiah ($120,000) since 2017.
In the four months that he’s been doing this “extracurricular activity” as a content provider, Prayogo already has close to 7,000 subscribers and published 30 videos, with his most popular upload having nearly 50,000 views.
It is easy to understand why his reviews get instant recognition: There are 161 P2P lending platforms to choose from in Indonesia alone, many of which are fighting for the same slice of the pie. Investors wading into those waters must deal with a history of unscrupulous players while counting on only minimal supervision and regulatory control from authorities.
Prayogo and other likeminded people are creating, perhaps unintentionally, an informal safety network that tries to prevent lenders from making bad choices. These are bloggers, social media influencers, and hundreds of lenders who are joined via Telegram and WhatsApp chat groups. Their interactions provide a naked view into how P2P lending platforms operate and suggest how festering unhappiness among grassroot participants could threaten the Indonesian P2P lending industry’s efforts to clean up its image.
P2P lending has been around in Indonesia since 2014, but its development stuttered in the first five years as a result of practices such as predatory interest rates and penalties, personal identity theft, abusive debt collection practices — including rape threats — and various fraudulent acts.
Public uproar against P2P lending culminated in February last year, when an indebted taxi driver in Jakarta took his own life and left a note for the Financial Services Authority (OJK) to ban P2P lending for good.
Indonesia’s so-called market conduct policy espouses a light-touch approach to regulation, and the government prefers to delegate power and allow market players to police themselves. As public perception of P2P lending hit a low, OJK inaugurated the Indonesia Fintech Lenders Association (AFPI) in March 2019 to bring some order to the market.
AFPI has created a code of conduct for all members and imposed rules such as an interest rate cap of 0.8 per cent per day, and banned abusive debt collecting methods. P2P platforms themselves are also trying to burnish their image; startups such as Julo and Koinworks confirmed that most of their annual budget was spent on marketing.
“We spend up to 40 per cent of our annual budget on marketing. We host 40 to 60 events per month to engage directly with our customers. This is our effort for market penetration and to improve public perception of P2P lending,” said Koinworks chief marketing officer Jonathan Bryan.
All of that effort seems to be paying off. OJK data shows that the number of borrower accounts has quadrupled in the past year to 20.5 million as of January, while the number of lender accounts almost tripled to 616,000. More than two-thirds of lenders are millennials, or those born after 1980. The total value of outstanding loans also more than doubled for the given period.
The increased activity has, however, been accompanied by a rise in the overall default rate, which increased to 4 per cent as of January from 1.7 per cent a year before. Loans are considered defaulted when not repaid within 90 days.
The true extent of credit stress is likely to be worse because the default rate does not capture instances where insurance protection is tapped and when platforms provide provisional funds. That is how some platforms get away with reporting zero default rates.
“This practice creates the perception that there is no risk involved. In fact, this is akin to putting on makeup. I wonder how long these companies can shoulder bad loans, especially now when the risk of defaulting increases with the impact of the coronavirus,” Prayogo said.
As more and more platforms provide investment protection, Prayogo advises caution by choosing platforms that are backed by a big conglomerate or have raised substantial capital.
Lenders are also united in their concerns regarding unreliable credit rating systems used by the P2P platforms. Experienced lenders understand that providing collateralised loans is a risky investment, but many platforms fail to provide the necessary tools and information for risk assessment.
“A-rated loans can default, so too can D-rated loans. This is not an issue. But the default rate of A-rated loans should be much smaller. This is not happening,” said a Kediri-based super lender who currently manages 5.6 billion rupiah of loans.
Most seasoned lenders are aware of this issue. Adrian Siaril, whose personal blog has become one of the top reference points for many P2P lenders, said different credit risk assessments can also be identified among platforms that focus on similar segments.
“Akseleran, Koinworks, Investree and Komunal share a relatively similar segment, but they all have varying quality of risk assessment. I once found a borrower who is rated A simply because he’s a repeat customer. When I check his income, it’s inadequate relative to the loan value,” said Siaril.
On top of unreliable ratings, lenders must deal with platforms using different standards of borrower data disclosure. The disparity can be extreme; while some platforms hide borrowers’ names, others show identification card photos, selfies and even family details.
Lenders are also complaining about poor administrative procedures. Some platforms need two to four weeks to disburse loans after fundraising is completed, instead of a more typical wait of one or two days. That delay locks funds in an unproductive state, delaying lenders’ collection of interest and depriving them of capital that could potentially be deployed elsewhere.
Loan project cancellation after fundraising completion is also a common phenomenon. When platforms cite borrower’s inability to provide necessary documents as the reason, critics point out that these problems should have been sorted out in the first place.
Thinking about all those problems, Prayogo reckoned that Indonesia’s P2P lending market is at risk of scandals relating to bad loans and poor practices that plagued San Francisco-based LendingClub, once the most successful P2P platform in the US.
“The company was under pressure from a rapid increase in demand. So, they decided to relax their risk mitigation, allowing bad loans to enter the market,” he said, noting he saw more defaults last year compared to when he first joined P2P lending in 2017.
Prayogo confessed that he’s not going to inject more funds into his P2P investment this year, preferring instead to buy stocks in a bearish market.
Platforms on defence
The industry appears, for now, to be staying its course. AFPI is reluctant to create a universal credit scoring system due to the complicated nature of such an undertaking. Startups are also in agreement.
“This is actually an arena for competition among P2P platforms. Those that can provide reliable credit scoring will be rewarded with good public perception,” said Akseleran co-founder and CEO Ivan Tambunan.
Tambunan also argued that the availability of insurance protection can be considered as an indication of a platform’s ability to assess risk. “Reputable insurance companies will partner with companies that can manage their risk wisely.”
Lastly, he stressed the importance for all lenders to diversify their portfolio, saying that every lender should spread their funds in at least 100 loan projects to minimise risk.
The industry’s defence of the status quo is increasingly being tested, however, as the social networks used by lenders to mitigate their risks also help to fuel and spread anger and unhappiness when things go wrong.
Crowde, an agriculture-focused P2P lending platform, is facing such a predicament. The company is under pressure from lenders who felt that they were misled by its credit scoring, and who are demanding the return of funds locked in hundreds of projects that defaulted on loans worth 4.4 billion rupiah. Some of these lenders have been trying to recover their money since 2018 and many have managed to recuperate some, if not most, of their money.
Crowde co-founder and CEO Yohannes Sugihtononugroho said his company has “responded comprehensively” by engaging directly with the lenders and by helping farmers meet their financial obligations.
“Retail lenders often consider all their portfolio as the same. Agriculture is different. Last year many farmers suffered from a prolonged drought. But we are committed to helping farmers repay their debt,” Sugihtononugroho said.
Despite the rift, Crowde’s lending performance is showing no sign of crisis with non-performing loans at 3 per cent of the loan book, relatively on par with its peers, and total outstanding loan at 74 billion rupiah.
Unfortunately, the bad experience with retail lenders has convinced Sugihtononugroho to stop Crowde from taking funds from individual investors since the beginning of the year, preferring to focus on institutional lenders.
What happened to Crowde was not an outlier, said Akseleran’s Tambunan, but it begs an existential question about what peer-to-peer means when retail is kept out.
“Retail lenders are what make us peer-to-peer. Without them, we are no different than a multi-financing company that uses technology to distribute loans. Things can get challenging, but this is the beauty of P2P lending,” Tambunan said.
Crowde’s case also raises concerns over whether OJK’s market conduct policy is working effectively.
When asked to weigh on Crowde’s case, AFPI put the blame on the lenders, saying it was a classic case of lenders failing to recognise the risks involved in P2P lending. The association does not see weakness in Crowde’s operations or accept the possibility that the case is reflective of a wider issue regarding the lack of credit assessment standards in the industry.
“Lenders must realise that there’s always a possibility that borrowers are late in repaying their debt. So long [as] the P2P platform maintains communication with the lenders, I see no problem,” AFPI executive director Kuseryansah said.
Crowde’s disgruntled lenders were sceptical about AFPI’s objectivity and willingness to investigate, and reached out to OJK for help. The higher authority sided with the industry group, fueling an explosion of anger in social media and chat groups.
Crowde is a relatively small player in Indonesia’s vast and highly fragmented P2P market, and its community of unhappy lenders may not be enough to significantly dent the current excitement about P2P lending among the country’s retail participants. But enough drops of water can make a mighty ocean.
Retail lender Siaril argued that much of the policy responses from both OJK and AFPI have largely been reactive rather than strategic, aimed squarely at addressing public concerns on the bad treatment of borrowers in the past.
“Practices have become more standardised after AFPI adopted the code of conduct, but these are mostly to protect borrowers, not lenders. Protection for lenders is still far from adequate,” he said.