Continuing with my fintech posts once again, I return to Asia and look at Chinese P2P Lending.
Chinese P2P Lending – A brief insight
China’s peer-to-peer lending sector has emerged as the largest and most dynamic online alternative finance sector in the world. (ACCA, October 2015)
The P2P lending industry has increased since 2011, with 2,600 platforms by the end of 2015, but has experienced stops and starts due to issues in controlling risk. Over the past year around 1,000 businesses have closed. Risk has been a major talking point, especially with credit risk – a few commentators have mentioned that data mining could provide a way to identify better borrowers, but this ultimately depends on availability and dimensions of data.
In addition, many have stressed that standards need to be put in place in the industry such as being more transparent, the requirement of loan loss provisions, as well as having safety requirements that are put in place to modernise and regulate the industry.
Chinese P2P Lending – Ezubao Scandal
It’s no surprise that many have commented on the industry and how measures need to be put in place after the Ezubao scandal. At the start of the year, it was announced on Chinese state media that the company cheated over 900,000 investors out of US$7.6 billion.
According to a few sources, 95 percent of investment projects on Ezubao’s site were fake.
The downfall of Ezubao definitely tarnished the industry’s reputation in China, however, the government are clamping down on companies that don’t play by the rules.
They have banned P2P platforms from securitising assets or offering debt transfer mechanisms that mimic securitisation. Companies are prohibited from using P2P platforms to finance their own projects according to The FT.
These regulations mark the first comprehensive framework for regulating the P2P industry in China.
Xu Hongwei, chief executive of Online Lending House told the FT : “In the past when there basically were no limits, and lots of people operated in the grey area. It won’t be like that any more. Now that we have standards, you just follow the standards. The whole industry will become more normalised.”
The Chinese government has a made a push on alternative finance to help people who struggle to access loans from banks (who are known to lend to large corporates or those with hard assets to pledge as collateral).
There are still over a 1,000 what has been dubbed as “problem platforms” in China and these equal to nearly half of all platforms.
Other rules that have been in place that standout include restricting P2P groups from operating “fund pools” in which investor funds are not matched with specific loan assets.
Also, a cap on the amount consumers and businesses can borrow has been put in place. For consumers the cap stands at 200,000 yuan on one platform a 1 million yuan over multiple platforms. For businesses the cap is 1 million yuan on a single platform and 5 million yuan over multiple lenders. (Crowdfund Insider, August, 2016)
Moreover, P2P companies will not be allowed to operate “offline”. Platforms must abide to transparency regulations such as lending statistics and the rate of defaults. In addition, a blacklist will be put together to block bad actors from fraudulent activities.
Before these P2P rules came into play (and the Ezubao scandal), people didn’t really judge on which platform is good or bad, however, now they have a clearer idea on what’s going on. As a result, investors have become more vigilant on platforms that are breaking the rules.
*Ezubao Image : Fortune