Trade Resources Economy Peer-to-Peer Lending Is Facing Its First Serious Government Regulation

Peer-to-Peer Lending Is Facing Its First Serious Government Regulation

Peer-to-peer lending, websites that allow individuals to borrow money from other individuals without going through banking middlemen, is facing its first serious government regulation as defaults undermine confidence in the online systems.

The call for greater oversight comes as peer-to-peer lending accelerates. Last year, such online loan platforms nearly doubled to 1,572, involving some 252.8 billion yuan (US$40.3 billion) in borrowing, according to Online Lending House, a web portal that tracks the sector.

The sector has the "potential to reach total trading volume of 1 trillion yuan," Dong Yuping, director of the Investment and Financing Research Center at the Chinese Academy of Social Sciences, told a forum in January.

Peer-to-peer lending actually began as a concept to "democratize" finance by bringing borrowers and lenders together. Individuals could pitch their need for small amounts of cash and those with spare cash could offer to lend it to them at an agreed interest rate.

The rates were typically higher than those charged by banks, but the red tape and institutional scrutiny of obtaining a loan were removed.

The global popularity of the new online finance system and the prospect of higher returns for lenders soon attracted the attention of big banks, private equity funds and asset managers, who entered the sector and began changing its complexion.

"With commercial banks and state-backed companies joining the game, fierce competition is predictable," said Dong. "The real battle will start after the regulations are set."

Regulation in China moved to the forefront after several websites went belly-up, with lenders losing their money. In the first two months of this year, an estimated 127 platforms reported defaults or had difficulties withdrawing cash, Online Lending House said. That followed defaults at 275 such platforms last year.

"Marketplace access and exit, information disclosure and platform operations will be main points for further discussion," Ma Weihua, former president of China Merchants Bank and president of Wing Lung Bank, said in a proposal submitted to the Chinese People's Political Consultative Conference last week.

Indeed, bureaucracy is gearing up for regulation. Li Junfeng, former director of the Financial Collateral Department at the China Banking Regulatory Commission, has been named to head a new Financial Inclusion Affairs Department to oversee peer-to-peer lending. His appointment was announced at the annual meeting of China's legislature last week.

Leading peer-to-peer lending services say they "welcome" regulation if it makes the industry stronger and healthier, and "could even gain benefit" if it makes explosive growth more orderly.

Some companies are seeking to enlarge their capital bases to give themselves an advantage as competition heats up.

Shanghai Lujiazui International Financial Asset Exchange Co, which operates the Lufax.com site, said it plans to increase its business scale 10-fold from last year, when it transacted 70 billion yuan in loans, according to a company official who refused to be identified beyond her surname Zhang.

Lufax, which is backed by China's second-largest insurer, Ping An Insurance Group, was launched in March 2012. It now has more than 5 million customers, most with solid credit ratings.

According to Chinese media reports, Lufax received its first round of equity financing, valuing the company at nearly US$10 billion, in December. Details were not disclosed, but the reports said Ping An, Morgan Stanley and other institutional investors were involved.

"It's a fight to see who will survive in this industry," Gregory D Gibb, chairman and chief executive officer of Lufax, said in an earlier interview. "Our customers tend to invest in larger amounts, and that's our advantage when competing with other platforms."

CreditEase, a Chinese leading service that operates yirendai.com, had 3.5 million users online and a lending portfolio of more than 3.5 billion yuan at the end of 2014, according to Fang Yihan, the company's general manager.

He said CreditEase may seek a public listing to raise funds. That ambition may have been influenced by the successful December IPO of San Francisco-based Lending Club Co in the US, which raised around US$900 million.

Shengzhen-based Hongling Chuangtou E-commerce Co has already begun preparations for an IPO. It aims for market value of 50 billion yuan in three years, according to Chief Executive Zhou Shiping.

Last year, the 5-year-old company's transactions multiplied almost eightfold to 14.7 billion yuan, according to its annual report released on its website. Hongling also said it is pursuing legal action to recoup a 70-million-yuan loan default by Senhai Gardening Landscape Co.

Concerned about rising defaults and the effect they may have on investor confidence, peer-to-peer lenders are taking steps to ensure loan security via third-party guarantors, such as banks.

Beijing-based online lender Jimubox signed an agreement on February 12 with China Minsheng Bank to safeguard investors' funds. It allows its investors to conduct all their financial transactions seamlessly through a platform linked with the bank's official website, the company said.

Renrendai and Minshengyidai, another two online peer-to-peer platforms, have since joined the agreement.

"CreditEase will add the Industrial and Commercial Bank of China and China Construction Bank as our partners by the end of June," the company's spokesperson Xu Yan told Shanghai Daily, adding that it signed a similar strategic agreement with China CITIC Bank in January.

Source: http://www.ecns.cn/business/2015/03-09/157286.shtml
Contribute Copyright Policy
Peer-to-Peer Lending Boom Begets Regulation
Topics: Service