magpie2020, on 29 July 2011 - 10:44, said:
My opinion: I like the way GG portrays bad debt in the other thread. Looking at it by market, and comparing my own loan book experience to the Zopa estimates/predictions seems to be the way to go. At the moment, I have only been lending a few months so fortunately I don't have any bad debt figures to play with, but I know it's going to happen so I'd like to be prepared and when it does, be able to monitor whether my lending strategy is achieving the expected results.
I want to throw this out there to see what the collective view is.
So now let's say Zopa report Market Xnn as having bad debt of Y%. So the spreadsheet is changed to report actual bad debt performance against the base figure of Y% for market Xnn.
That is basically what has been described.
Q1) Now Zopa change the expected bad debt rate for Xnn from Y% to Z%.
What do we do in the spreadsheet?
I can't see how reporting bad debt by market can really be useful. We need a time dimension. But as soon as we add time then for most people the number of loans is too small to be statistically relevant.
Q2) My finance training tells me that bad debt analysis must consider value at risk (VaR). Now for Zopa, I think that means correlating bad debt and loan size. VaR seems to apply to Zopa in that we would expect (?) a different bad debt performance for a given market between those that offer ZopaRate-1% and therefore collect a high percentage of small loans, compared to those that offer ZopaRate+1% with the aim of getting only big loans. So this drives toward having a loan size dimension for bad debt reporting. So this reduces the number of loans per reporting point even more.
I hope you can see the mental block I have on this subject- If I am making this too complicated, you can just let me know.
Edited by Geoffj, 29 July 2011 - 18:05.