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Funding Circle Gets Better
Funding Circle has shown itself to be extremely adept at learning, so that it can improve borrower selection, lower bad debts and increase recoveries when loans go bad.
Everything else being equal, this translates into higher returns. It also is likely to mean that bad debts will rise by fewer multiples during really bad times such as a major recession, which reduces the shock.
Here are the interesting bits from a recent analysis by Funding Circle of its loanbook.
Funding Circle gets better at selecting borrowers
Funding Circle has just shown how its borrower selection has improved over time by comparing public records of businesses it rejected to the results of its loanbook.
For each borrower it selected in 2010 and 2011 that went on to become a bad debt in under 35 months, Funding Circle rejected just one other borrower that also went bad while borrowing from another lender.
In other words, its selection process only weeded out half of the borrowers that became bad debts.
Looking at loans matched in 2012, you can see Funding Circle learned a lot in those first two years. For each borrower that turned into a bad debt in the first 30 months, it rejected three borrowers that went on to become bad debts for other lenders.
2013 loans are currently another improvement again on 2012, although it's too early to tell how it will look in 30-35 months. And 2014 is barely over, so Funding Circle didn't include the figures.
Bad-debt rates are lower
The amount of losses has also fallen.
For loans made in 2010/11, 6% of the amount lent went bad and was not recovered after 30 months.
In contrast, for loans made in 2012 the loss rate was 4%. A dramatic reduction. The improvement for 2013 over 2012 is too early to see, but it currently appears to be small. It's no surprise that it learned more, and bigger, lessons in its first two years.
There are fewer late payers
Late payers have fallen from 1.5% of the number of borrowers to 0.7%.
Funding Circle is getting better at recovering bad debts
When Funding Circle started handling bad-debt recoveries in-house, rather than outsourcing it, it was recovering less than 15p in the pound. Now it is up to more than 19p in the pound.
That's still low, but long term it is expecting to increase the recoveries to 40p in the pound or more.
The Funding Circle analysis also considered how and why interest earned has risen as time has gone by, but the main reason appears to be that it has added lower (riskier) borrower grades as time has gone by, so it's not such an interesting result.
It also added higher minimum interest rates, but since this happened at the time it introduced C- grade loans, it's impossible to see how much of the higher earnings since then is a result of higher interest rates for higher risk loans and how much is from setting the higher minimum interest rates.
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