- When a repayment is late, we apply a provision to your outstanding capital.
- The provision increases the longer the repayment is late.
- The provisions are reflected in your current internal rate of return and your gains.
Difference between provisions and losses
Provisions represent the amount of capital considered as lost at a precise moment. In case of default, we apply a provision to your outstanding capital, to give you the most accurate picture of the health and profitability of your portfolio at any given time.
Nevertheless, provisions are not actual losses. Until a debt is legally considered as lost, recovery actions are carried out by October to get part or the totality of the money back.
How does October apply provisions?
The haircut applied on the outstanding capital of project in defaults increases with the number of days of delay:
- Loans which are less than 30 days late or rescheduled loans: 40% haircut,
- Loans which are between 30 and 120 days late: 80% haircut,
- Loans which are subject to a legal recovery procedure or more than 120 days late: 100% haircut.
Generally, the longer the borrower is in default, the more delicate his situation is and the less likely he is to repay.
How do provisions impact my portfolio?
Provisions, as well as early repayments, affect your portfolio, which is continuously updated.
On top of the outstanding capital of the project in default, provisions will have an impact on:
- The total amount of your outstanding capital: the outstanding capital is the amount of capital due by the borrowers, interests and provisions excluded.
- Your internal rate of return (IRR): the IRR takes into account all the cash flows (investment, monthly repayments and defaults) and expresses them in an annual return. There are 2 IRRs in your portfolio: the initial IRR, which represents the annual return of your portfolio without any default or early repayment and the actual IRR, which provides an adjusted view of your returns after defaults and early repayments.
- Your gains: gains are calculated by resting the provisions and losses from the total amount of interest received so far. This may result in a loss of gains in your Portfolio page but that does not mean your portfolio is loss-making. Indeed, future interests from your current projects, which are not in default and are not taken into account in the calculation of gains, may cover the potential losses. That’s why you may see a negative number in the Gains section of your portfolio but actually have a positive internal rate of return.
Nevertheless, this implies that you have diversified your portfolio. Diversifying and balancing your portfolio by lending small and equal amounts to the maximum number of projects (at least 50) is key as it will minimize the impact a default can have on your global profitability.