New service for private investors the opportunity of direct lending to legal entities by physical persons
Recently Alfa Bank in Russia has launched a new service for physical persons. Now everyone can directly credit the legal entity via a special platform. It is noteworthy that Ukraine has also started a similar project under the auspices of the country’s largest Bank PrivatBank.
In late February, Alfa Bank launched a new service called “Stream” that ensures lending the legal entities by physical persons. In other words, instead of investing the deposit, the Bank will direct to loans, individuals can directly “give credit” to the interested SMEs. The product is very interesting because up to this point, individuals could lend to companies by buying bonds that could be done only through a broker, with the attendant problems (complexity of registration, numerous commissions etc.)
Loans to legal persons by physical persons: how it works
During the first hour of service in a test mode individuals invested 1 million rubles, during the day, the service collected 29 million rubles, after which the test mode has been stopped.
The idea of the project is that the investor is investing in the investment package, which consists of dozens of potential borrowers — legal entities. Package is equipped by a bank and is a ranking of borrowers in several categories. It is expected that by the end of may such options will be launched as “Best production company”, “fastest growing company in IT sector”, etc. It is logical that in the assembled pool there are companies that are already credited at Alfa-Bank.
The Bank takes responsibility to check the credit history of each company affiliated with the investment package, and to determine the maximum amount of credit loan for each company (credit limit). The investor’s money is distributed in accordance with the requirements of the companies. The System of bank evaluates more than 200 parameters: business activity, financial result, assets, data management etc.
Loans to legal persons by physical persons provides the registration of the contract between the investor and Alfa-Bank.
Investment conditions: the minimum sum — 10 thousand rubles., maximum — 500 thousand rubles, crediting period — 6 months. During the test mode, about 500 investors invested the money. Planned rate of return — 30% per annum.
The facilitator (Alfa Bank) sais about the yield of 30%, subject to timely repayment by the borrower of the loan and no early repayment. If the loan is paid off early, the yield will be reduced, in case of delay (and successful repayment) increase (penalty amounting to 0.15% of the overdue amount for each day).
- an investor who receives income higher than the deposit rate. Processing of deposit is free;
- the bank earns on commission, which is paid by the borrower-legal entity (4,35% with each payment but not more than 1920 RUB.);
- borrowers. Those clients get to “Flow” who, for one reason or another do not fall under the standard program of banks. However, we are not talking about sub-Prime (bad) credis. Example: company-tour operators who, for objective reasons, do not have a license, and therefore can not get a loan.
There were attempts to implement such ideas in 2011-2012. At that time the platform was a separate startup that attracted both potential borrowers and lenders. But the site only worked in the direction of personal loans. The main difference from the classic deposit is that deposits are dispose by the financial intermediary, whereas in this case, the mediator only connects those who have money and who needs them. For the legal organization of the process, the mediator receives a commission.
The scheme, built by Alfa-Bank operates in the following manner:
- the investor must become a customer of Alfa-Bank by issuing plastic card with a monthly payment of 89 rubles.;
- before investing a physical person gets familiar with the Declaration of risks. Crediting of legal entities by individuals may result in the loss of all invested funds (what the Bank warns).
Suppose you decided to invest 10 thousand rubles in a package in which there are about 30 companies (i.e., each entity received a loan in the amount of 350 rubles). Credit agreements are made automatically in electronic form. First the money can come back in a few days, in case of early repayment. As the practice showed (in the course of the experiment this amount was invested to “Stream”), 10% of companies have repaid the loan ahead of schedule, 10% were past due on a loan but has repaid it in full in a week. The total yield for the month was 11.6% per annum.
To some extent this investment has turned profitable, as the rate on deposits was at the level of 8-10% per annum, but it is to far to the stated 30% . In addition, the investment becomes quite risky for several reasons:
- someone will repay the loan ahead of time (the yield will decline), and someone will not repay the loan;
- a deposit in a bank is insured for a fixed amount. In this case, the risks lie on the investor;
- income from operations is taxed at 13%, which bank deducts as tax agent.
A similar service was launched in Ukraine by the largest bank in the country — PrivatBank. Here online service “Privat 24” offers to invest for lending to individuals at 25% per annum for 6 or 12 months. Loans are evenly distributed across borrowers-individuals, however, the investor has no idea to whom, and how the funds are allocated. It is noteworthy that the investment is insured. In the future the program of crediting of small businesses should be launched: hairdressers, cafes, small shops, which fall under the main loan terms.
Loans to legal persons by physical persons have fairly high risks. The conservative banking system knowingly refuse to grant loans to such clients. There is no mentions about the pledge. In other words, the Bank takes a commission only for the transaction and verification of the financial condition of the borrower, and an individual places money at his own risk.
On the other hand, if massive non-payments of borrowers will follow (experts say at least 10%, therefore are in no hurry to launch similar services), it can hurt the reputation of the bank, as it is partly responsible for the quality of the analysis of financial statements.
Despite all the risks, this investment idea can be very attractive from the point of view of profitability for the diversification of capital, and is comparable with investments in mutual Funds or securities.