Risk ratings are to assist investors in easily evaluating the different providers. The score is based on the track record of the provider as well as the partner’s fee structure and level of risk sharing. While these factors are historically tied to partner performance, they are not a guarantee of future performance.
Please remember that there are many risk factors
to consider in addition to the partner-related ones. While the risk rating may provide useful insight, it is entirely up to the investor to make his or her own judgment of the risks involved with a specific provider or a specific investment.
Risk rating is a 5-star rating system. Each provider is given a risk rating that is derived from the rating of various indicators:
A high risk rating indicates a strong track record and a good alignment of the partner’s incentives with the interests of the investors.
A low risk rating indicates a weaker track record and lower level of alignment between the partner and the investor incentives.
Benefits of Risk Rating
- Provides a simple and transparent way for investors to easily compare providers
- Motivates the partners to take actions to improve their risk rating in order to attract more investors and attract bids at lower interest rates
Note that a low provider risk rating does not necessarily mean a bad investment. A low rating can mean a higher risk, so the investor should typically ask for a higher interest rate on loans from the low rated providers in order to cover that risk and still make a profit. Conversely the investor cannot expect to get as high an interest rate on loans from providers with a high rating.
The performance indicators involved in Risk Rating
There are 12 indicators in our risk rating system, divided into 2 main categories: ‘Skill’ (the provider’s track record) and ‘Will’ (the alignment of the partners incentives with those of the investors).
This category gives an indication of the partner’s skill in managing a loan portfolio. The rating is based on historical data from the MYC4 system as well as subjective ratings made by MYC4 or external agencies. The rating includes:
Months on MYC4
This is the number of months since the partner uploaded their first loan. This gives an indication of the partners level of experience and is also used to determine the weight of the other parameters in the final rating. The risk rating of partners with a long history on MYC4 is based primarily on their track record at MYC4, while a subjective due diligence score weighs more in the risk rating of new partners.
This is the percentage of the outstanding portfolio that is 31 days or more late in repayments. PAR means Portfolio at Risk. A high value indicates higher risk and gives a lower rating.
Change in PAR30 in the last 6 months
This is the current PAR30 value minus the PAR30 value 6 months ago. This is an indication of whether PAR is getting better or worse. A larger value shows that the PAR is increasing and gives a lower rating.
Worst PAR30 in the last 12 months
This is an indication of how stable the partner performance is. A high value indicates higher risk and gives a low rating.
This is the percentage of funds lent out through this provider that have defaulted. A high value indicates higher risk and gives a low rating.
Sum of repayments / total disbursed
This is the total amount of repayments collected by the provider divided by the total amount of loans that the partner has disbursed. A high number means a slow growth and a good collection rate - this indicates lower risk and gives a higher rating.
Spot Check Score
This is a subjective score provided by MYC4 based on the most recent spot check.
This rating is carried out by independent agencies such as Micro Rate or Planet Rating. The rating is then normalized to a 0-10 score where 10 is best. If no recent rating is available then the partner receives a score of 0.
Due diligence score
This is a subjective score provided by MYC4 based on the due diligence evaluation carried out by MYC4 when the organization was approved to become a MYC4 partner. For organizations that have been a partner for more than a year, this score will instead be based on an annual review of the organization carried out by MYC4 staff.
This category gives an indication of how strongly the partner’s risks and rewards are aligned with those of the investors. The score includes:
Percentage of outstanding portfolio covered by risk sharing fund
Deriving 5-star rating for each provider
Providers with risk sharing agreements have put up security in the form of a bank guarantee or cash deposit to cover their obligations to the investors under the risk sharing agreement. The higher the score, the larger the amount of security put up by the provider.
Percentage covered per loan by risk sharing
When a loan defaults on the platform, the provider has committed to cover a certain percentage of the outstanding principal out of the risk sharing fund. The higher the score the larger the percentage covered by the provider.
Ratio of repayment over closing fees
Closing fees are earned upfront when the loan is disbursed whereas repayment fees are only earned as the loan is repaid. For example a provider earning a 1% fee on disbursement and a 5% fee on repayments has a ratio of 500%. Evaluation is based on only the last 6 months. Partners with a high ratio of repayment fees over closing fees have a high incentive to collect on the loans and are given a higher rating.
Each performance indicator is given an evaluation. An evaluation can be based on objective data in our systems (e.g. PAR) or based on a subjective evaluation made by MYC4 or an external agency during a review of the provider.
Each performance indicator also has a weight assigned by MYC4. The weight of each indicator can vary based on how long the partner has worked with MYC4, i.e. for newer providers where we have limited historical data, we weight the subjective rating data higher, while for older partners we weight the objective data higher.
This result in a final weighted score from 1 to 10 which is then translated into a five star score for easy viewing – e.g. a rating of 9 becomes 4½ stars.