NEO Finance would maintain positive cash flows and operate profitably even in the case of economic downturn

NEO Finance would maintain positive cash flows and operate profitably even in the case of economic downturn

At the beginning of this year, NEO Finance, which administers the leading Lithuanian P2P lending platform, performed a simulation of an economic downturn situation, the so-called “stress-test”.

The aim of the simulation was to measure the extent of the effect an economic downturn would have on the company’s activities. In this case, the company clearly calculates possible losses and thus prepares for a crisis scenario that has recently been often escalated in the public.

The main external factors underlying the crisis simulation of NEO Finance were the following: increased number of insolvent credit receivers, decrease in the volumes of new business and increase of litigation costs. Furthermore, the fact that the receivable amount for services provided by the company accrued at the beginning of the simulated downturn amounted to EUR 3.2 M was taken into account.

Seven assumptions were made in the course of the simulation:

  1. The economic downturn starts in April 2019. The brokerage fee accrued and to be received in future periods by NEO Finance amounts to EUR 3.2 M.  
  1. Irrespective of the fact that the interest rate proposed by the recipients of loans grows, the volumes of loans extended decrease by 40% as a result of reduced investments.
  1. The number of insolvent creditors doubles. However, judicial processes are not being suspended, whereas NEO Finance continues covering the expenses associated with the debt collection for the investors, which it expects to eventually recover from the loan recipients.
  1. Surety obligations under the Provision fund service agreements in respect of the investments made are being fully met – for this purpose, the accumulated funds are being used. No funds are being received under newly concluded surety agreements.
  1. As a result of decreased volumes, the cost price is also decreasing, with marketing expenses comprising the major part of it.
  1. Through business cost optimisation, operational expenses are being gradually reduced: the number of employees and expenses intended for IT improvement are being reduced.
  1. NEO Finance, as the provider of consumer credits, reinvests in other credits only the portion of credit recovered from the loan recipients and uses the interests to cover the expenses.

After carrying out the calculations, the cash flows for the two years following the crisis would look as follows:

Thus, thanks to the accumulated brokerage fee of EUR 3.2 million that is carried forward to future periods, NEO Finance would maintain a positive cash flow at a time of economic downturn even in the case where the volume of loans issued decrease by 40% and number of bad debts doubles, by actively assuming the abovementioned actions.

NEO Finance is the only Lithuanian P2P lending platform to organise such stress tests at its own initiative and to publish the results. These tests are created and administered by the employees of the company – head of finance Andrius Liukaitis, board member in charge of risk management Marius Navickas and chairman of the board Evaldas Remeikis.

“Particularly now, as we prepare for the IPO, it is especially important for us to show our investors that we are a sustainable and transparently managed business, which has the potential to grow and also has accumulated a protective cushion to be used in a critical situation, i.e. crisis. All our reports drawn up from the beginning of our activities are available for the current and prospective investors on our website. Should you have any questions, we will be always glad to answer them”, said chair of the board of NEO Finance Evaldas Remeikis.

NEO Finance is the only Lithuanian P2P lending platform, which has an unrestricted licence of an electronic money institution that allows operating throughout the European Union. Investors of the platform have the possibility to reduce the risks their investments are exposed to by using the Provision fund and buyback service. NEO Finance takes care of developing and improving its platform itself, thus ensuring security, confidentiality and prompt response to its customer needs. In total, the platform has already granted loans amounting to over EUR 30 M, with investors earning a return of 17.5% on average

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