It is some years now since the Government decided to raise a bit of cash by packaging up and selling the student loan book — one of those tasks which is much easier said than done because it takes for ever to sort out the good payers from the bad payers, the fast payers from the slow payers, those who might pay something one day from those who won’t even if they win the Lottery.
But yesterday was the big day. Some 411,000 loans, neatly divided into four bunches — or tranches, according to their different levels of quality and the time they have left still to run — were offered to the City.
And they got a result. All the loans were snapped up and according to the press release: “The sale has achieved value for money according to the HM Treasury Green Book Rules.”
Relief all round you might think except that at the top of the first page it says the sale raised £1.7 billion and at the bottom of the second it mentions, in a throwaway line, that the face value of what was sold was £3.54 billion. So, they actually got less than half the face value of the loans they sold.
They say the discount is because the interest rate has an element of subsidy (it is 1% over base rate) and because of the time value of money. This relates to the fact that it is normal to accept less now in return for the certainty of being paid, rather than hold out for the full amount and risk that you won’t be paid at all.
It is, nevertheless, an interesting way to raise money for the Exchequer and prompts the thought that if this is value for money under the terms of the Green Book we have to hope the Treasury never decides to produce a Red volume.
But the real story comes from taking a close look at the tranches. The first three are fairly unremarkable and sold at between 86.5 pence and 99 pence in the pound. But the fourth tranche, accounting for fully 54 of the total, was sold for just 8.5 pence in the pound. What this means is that roughly half the loans are virtually dud and those owing the money clearly have little intention and possibly lack the ability to settle them.
This raises two further points. This sale relates to loans which were granted before 2012 when conditions were a lot easier.
If the experience of these relatively modest amounts is that half will most likely never be repaid, how much worse will be the experience of the more recent generation of loans where the sums involved are significantly greater.
And that raises a further point. Jeremy Corbyn proposed scrapping student loans and was howled down by the Conservatives who said it would cost billions and the nation could not afford it.
Well if we are likely to get back less that half the money anyway, his policy looks a lot less expensive.
And in social terms the few billion it might cost would make a massive difference to the lives of hundreds of thousands of young people and might easily be considered money well spent.
Peer-to-peer lender shows how it’s done
A commonplace observation of this country is that it is good at inventing things, not bad at starting up businesses but pretty poor thereafter at growing them and scaling them into world beaters. Too often our most promising young companies either get stuck in their early stages of development and never make much of an impact beyond these shores or they attract the attention of an overseas buyer who takes them up before they are properly mature and sucks out the intellectual capital, so that even if the business prospers subsequently the benefits tend not to flow to this country.
But it is not always like this. Funding Circle is a peer-to-peer lender operating via a web-based platform which it uses to connect small businesses looking for loans with individuals and institutions willing to lend. It was not the first such business— there are now at least 100 others out there in the UK alone — but it was one of the first to work hard at raising outside capital to finance its rapid expansion. Today that looks to have paid off. It is emerging not only as one of the most successful financially oriented tech start-ups in this country, but also globally.
That fact was underlined this week when it announced that it had passed two notable milestones. First it has now mobilised loans in excess of $5 billion since it was set up just a few years ago. Second, its business in the United States has just passed its $1 billion milestone, which is a notable achievement given it was late into the US and has had to compete with several robust and well-financed incumbents some of whom were willing to burn a lot of money to attract and retain market share. It has seen most of them off and its US success makes Funding Circle the first platform anywhere in the world to have organised more than $1 billion of lending to small businesses in two separate markets.
In the month of November, lumping together all its operations here, elsewhere in Europe and in the US it was responsible for $260 million of new lending.
This it suggests might make it the largest small lending platform in the world. So we can do it sometimes — just not often enough.