Wellesley’s Provision Fund Shrinks to 1.3x

Update on 5 December 2014: Wellesley's bad-debt provision fund jumped back up to 1.8 times as amount on loan and protected by the fund dropped £20 million. Wellesley explained that its figures are entered manually, so the big drop was merely a human error.

Wellesley & Co's bad-debt provision fund now covers expected bad debts 1.3 times over, down from 1.9 times. So for each £1 of expected bad debts there is £1.30 in the provision fund set aside to cover it.

Although the amount in the fund has gone up £40,000 to over £925,000 in the past few weeks, Wellesley & Co. has helped lenders loan out more money at a staggering rate. The amount of loans now covered by the bad-debt provision fund has risen from £46 million to £70 million over the same period.

Lenders through Wellesley & Co. have over £110 million on loan, but money lent by financial institutions and Wellesley's own directors is not covered by the provision fund, which is solely for individuals. That explains the difference of £40 million.

Wellesley puts a variable amount into its bad-debt provision fund for each loan based on its assessment of how safe the loan is. Wellesley has had no bad debts and no arrears on 126 property loans in the 13 months it's been matching borrowers with lenders' money.

The pound amount in the fund has gone up so if just a few loans go bad you are better protected than before. However, more loans means more loans can go bad.

4thWay^® Risk Rating unaffected

The size of a bad-debt provision fund is taken into account in the calculation 4thWay uses to objectively score the risk of each P2P lending opportunity, so that you can more easily compare the main, inherent risks.

However, Wellesley kept its very low 4thWay^® Risk Rating of 12 by the skin of its teeth. Wellesley has a mathematical adjustment to its score due to the directors taking a hit on losses before individual lenders and before the bad-debt fund is tapped. The directors own 5% of every loan and they will lose it first. The adjustment is small in arithmetical terms, but it was enough to help Wellesley leave its score unchanged.

4thWay^® Risk Ratings will change from time-to-time due to a number of factors, one of which is the size of the bad-debt Provision fund.

RateSetter, Zopa, Lending Works and a few other P2P lending companies have bad-debt provision funds. They do not always stay at a steady size, but generally they increase rather than decrease.

Sources: 4thWay^®

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The 4thWay^® Risk Ratings were devised by experience Investors with the help of a debt specialist from one of the Major accountancy firms. The score is calculated using objective criteria that can be measured and improved over time. No risk-scoring system is perfect, not least because rely on accurate and timely data from the P2P lending companies and the P2P lending industry is relatively new, so there is less information to base a score on. Read more about the 4thWay^® Risk Ratings.