Small and medium sized enterprise (SME) lenders can expect defaults and losses as they aren’t fully prepared for a downturn, according to OakNorth co-founder Rishi Khosla.
“A default is inevitable in the business cycle,” said Khosla, who was speaking at Money 20/20 in Amsterdam. Khosla is adamant that OakNorth will perform better than its rivals when the market enters more difficult conditions.
“We’ve had no defaults to date but at some point of course we’ll absolutely have defaults but I’m extremely confident that we will have lower defaults and lower losses than the market will in general,” he said.
In 2018, lenders approved over 290,000 loans and overdrafts totalling £28bn in borrowing facilities to SMEs in the UK, according to UK Finance. However, research by debt advisor Hadrian’s Wall Capital highlighted a fall in outstanding loan values in 74 of the country’s 132 postal areas last year.
Although SME lending has become considered a risky business option for banks, OakNorth believes its use of algorithms to assess a loan's viability, as well as a close ongoing assessment of each loan, is a new way of funding that will mitigate contagion from an economic downturn.
“We do so much more work in terms of analysing a company before we go into it, and we monitor a loan in a totally different way than larger commercial banks monitor their loan books,” said Khosla. “A combination of those two things makes us highly confident that we will come out of a downturn better than other players.
“We will absolutely have defaults, we may have some losses but they will be significantly lower than the market and that we’re confident on,” he said.
OakNorth received funding of around $440m from Softbank and has carved out plans to expand its SME loan and credit facilities into North American markets.
“SME lending is broken and we want to solve it on a global basis,” he said. “To do that on our timescales we don’t think the way to do that is to have a capital-heavy model where we’re going from market to market building our own infrastructure. We believe that having built our own infrastructure in one country at a certain level of scale and taking that platform and its DNA and helping other institutions do the same in their local markets. It’s a horizontal cut rather than being just another player.”