P2P Firms Exploring Brave New Credit World
Thousands of employees linked in a 30-city network that provides loan services across China are not working for a bank, nor even a company with a financial sector license. They work for China's leading, domestic peer-to-peer (P2P) lending concern, the microfinancier CreditEase.
Although the company won't comment, industry sources say CreditEase's monthly loan business exceeds 100 million yuan.
And CreditEase is just one of China's dozens of P2P lending platforms, whose business overall has exploded in recent years in a loosely regulated business environment.
P2P relies on Internet contacts and eliminates the need for banks to act as intermediaries between borrowers and depositors. Individuals willing to lend money and individuals needing to borrow money self-match transactions through CreditEase's online platform. Platform revenues come from transaction fees.
This type of microfinancing has been around in China for a long time, but the tight bank credit environment that started two years ago has helped the P2P lending businesses in particular blast off.
Since 2009, the number of Internet companies with P2P lending businesses has increased from a few to at least 30, including the sector's leader CreditEase. The exact size of the industry, as well as total business volumes, are unknown.
These companies have also grown increasingly attractive to investors because they usually promise returns of 10 to 12 percent – much higher than those offered by most wealth management products at commercial banks.
Given the obvious risks for private lending, though, industry players have been asking regulatory authorities to strengthen controls. But neither the central bank nor China Banking Regulatory Commission (CBRC) have decided that the industry is within their scope of oversight.
At the end of August, CBRC issued a notice detailing seven risks tied to P2P lending platforms and ordered banks to watch them carefully. But the notice did not say how P2P platforms might reduce risks, nor mention possible regulations to control their growth.
Indeed, to date no government regulator in China has tackled questions about the legitimacy and sustainability of P2P lending platforms or the derivatives they've spawned.
Some micro-lenders have fallen prey in what's an increasingly competitive environment. For example, the 2-year-old P2P lending platform Haha Loans announced in July it would close due to "market credit issues" and a "shortage of operating funds."
Haha's announcement stoked worries about the future of the entire P2P model, including the future of CreditEase.
But CreditEase has expanded its business of late to include so-called offline clients, which could prove lucrative. Indeed, a growing number of P2P lending platforms have been shifting offline.
Caixin has learned that, with the exception of the oldest P2P lending platform PPDai.com, other P2P lending companies have launched offline businesses, which essentially operate like small-time loan companies.
CreditEase's offline operation involves financial products offered to lenders, and a lending team that vets borrowers to ensure proper credit levels and loan quality. Unlike its online P2P business, CreditEase offline does not let lenders and borrowers match and cut deals by themselves.
This offline twist has rankled many in the financial industry. They say CreditEase and others are now, in effect, no different than a trust or bank.
Bai Chengyu, secretary of the China Association of Microfinance, said the offline model lets firms take advantage of financial industry regulatory loopholes. He said a person who sets up a P2P lending firm, loans his own funds for microfinance company projects and then goes through the P2P lending platform to transfer creditor rights is in effect attracting deposits and making loans.
In essence, Bai suggested, P2P lending companies conducting offline business are bearing the same risks as banks by conducting banking business.
CBRC apparently recognized this loophole when it warned in the recent notice against P2P firms "evolving into illegal financial institutions attracting loans, and even conducting illegal fund-raising."
But as there are no laws or regulations about P2P firms, CBRC has been unable to explicitly bar P2P companies from engaging in offline business.
Another cause for worry among regulators is that many P2P lenders provide loan guarantee services. To attract customers, they often promise to pay the principle on a loan as well as accrued interest if a lender defaults.
The most often-used approach for loan guarantees is to set aside the equivalent of 2 percent of loans from a company's commission to serve as a reserve against risk. In the event of default, a company pays a pre-arranged amount that usually covers the principal owed an investor.
Such guarantees are unusual in the traditional corner of the P2P lending sector.
Bai expressed concern that higher yields in the P2P lending industry may result in uncontrolled flood of new companies entering the field before regulatory measures and risk management tools are in place.
PPDai.com chief Hu Honghui, who founded the company in 2007, says his is currently the only P2P lender in China that does not guarantee individual loans. He argues that a business model that includes a principal and interest repayment system is too risky.
"A platform does not have the capacity of banks to determine whether or not to grant loans," Hu said. "If there are a large number of bad loans, the company will go bankrupt if it cannot make repayments. And if it goes bankrupt, how will investors seek creditor rights?"
Hu said his business has been soaring since 2010, and the commission rates it currently charges are 2 percent on loans under six months and 4 percent for those due between six and 12 months.
Currently, most P2P companies operate as investment advisers or e-commerce processors, which do not need licenses but simply must register with government commerce authorities, explains a People's University School of Law professor, Dong Ansheng.
Increasingly, though, experts say regulations should be clarified to cover P2P lending including its online and offline components. They're also calling for industry standards and access qualifications.
Meanwhile, while regulators observe and wait for their next potential moves, one legal expert who asked to remain anonymous said the future for P2P lending companies remains uncertain. They may face problems and issues that cannot be resolved through legal means.
"If companies run into problems after they get big," he said, "they could be labeled as illegal business operators."
Meanwhile, efforts to form an industry self-regulation group are said to be falling apart over different opinions about proposed P2P lending standards.
"The beauty of being in this business now is that no one is supervising it," said the head of one P2P company.
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