The securitization of loans originated online, which has begun in the U.S. and is soon to be seen in Europe (ASRI 2/14/2000 p.3), is also likely to feature in Asian markets in the near future.
Start-up online originator SMEloan.com, which is targeting small and medium-sized businesses in Hong Kong, has confirmed that its business plan calls for its primary funding to come from the securitization of its loans.
"Building a large balance sheet is not the most efficient use of capital," said the company's chairman and CEO, Ming Sui. "We see ourselves as an aggregator, which assesses and manages lending risk and then converts that risk into investment grade risk which we sell to investors."
The efficiency and scalability of online lending will not only allow the company to compete against more traditional banks, it will also allow it to target the kind of small businesses that banks are wary of lending to, simply because the trouble and expense of servicing the loans, Sui said. Plus, online lending is ideally suited to provide the kind of standardized assets most easily securitized, while the fact that the loans will be small but diversified across small business sectors will also help.
Just as importantly, the securitization of the company's loans means that it will not have to hold high levels of valuable equity against its loan book.
U.S. venture capital firm Whitney & Co., is SMEloan.com's largest shareholder and Sui hopes that its expertise in structured finance will be valuable. The company has already had positive feedback from several investment banks, rating agencies and potential investors.
From a cost of capital point of view, Sui explained, securitizations will make sense once SMEloan.com has built up a loan book of at least US$75 million. Sui suggested that this will happen very quickly. "We talking Internet time, so not long at all," he said.
The company will initially target Hong Kong's 280,000 small and medium-sized enterprises, but will then look elsewhere in the region. "China has 10 million SMEs, Japan has 6.5 million, Korea has 2.6 million and Singapore has 90,000," Sui said.
SMEloan.com will not have all those borrowers to itself, as there are a number of online lenders setting up across the region, whether targeting businesses or individual borrowers. Softbank, Japan's struggling, but still powerful, Internet firm, for instance, is looking to set up a similar venture in conjunction with Nippon Credit and other Japanese financial firms.
In Thailand, GE Capital and Lehman Brothers have launched websites offering mortgages and consumer loans and similar enterprises have been set up by local banks in Singapore and elsewhere. "It is an inescapable fact that at some point ventures like these will turn to securitization," one Singapore-based banker said.