On June 18th P2P Finance Association announced that their members will be using a standard way to calculate default rates to help consumers compare the performance of the portfolios on different platforms.
In short, the new standards consider a loan default when it has been overdue for at least 120 days. You can read more about the press release and the formula on the P2P Finance Association web page.
Because our collection process will begin very early in the cycle, we will still internally consider 60 days as a start of the recovery process. The collection process itself will not change.
However, to help our investors compare the default rates and returns at Bondora with other platforms, we are providing an overview of default rates in the weekly newsletter according to the new standards.
Please note that we have excluded from the calculation all of the loans that were issued within the last 120 days to avoid artificially skewing the results positively due to any growth in new loan origination, which have had no possibility to default (review our June 11th newsletter for a more thorough explanation of default rate).
We have also provided a calculation on an estimated return based on these default rates and an expected recovery rate for the worst, moderate and best case scenarios based on the historical recoveries of our loan portfolio.
Please note, that as we don’t have any meaningful data on recovery rates for different countries yet, we currently use the same estimates for every country based on the entire Bondora portfolio.
The formula used for the estimated returns in the table is as follows:
(1 – default) * (1 + interest) + (default*recovery) – 1 = net return
You can also download this table as an .xls file to experiment with different recovery and default rates to see what the net return would be like.
Please also keep in mind that these calculations do not account for any positive effect of compounding interests nor taxes that you might have to pay on earned interests. Make allowance for it when considering your acceptable exposure to risk and calculating the estimated returns.
In the coming months the site reports will be adjusted to calculate data according to the new definitions.