Regulator Assessing Custodian Banks for Online Lenders

China’s banking regulator is assessing custodian banks for online marketplace lenders, as they attempt to weed out noncompliance in the burgeoning peer-to-peer (P2P) lending industry.

A national inspection team, led by the China Banking Regulatory Commission (CBRC), has recently asked local authorities that supervise online lending to assess commercial banks appointed by P2P platforms to provide custodian services for investors’ funds, multiple bank employees told Caixin.

“The assessment aims to clean up various risky operations arising from the custodian services for P2P platforms,” said a source close to the inspection team. “There will be a unified standard for providing such custodian services, and commercial banks must undertake the responsibility of ensuring compliance,” the source added.

Banks that pass the assessment will be put on a “white list” of compliant lenders, while those that fail have one chance make things right, according to an official from the National Internet Finance Association of China (NIFA), which is in charge of the assessment.

Banks on the “white list” will still be subject to random inspections, the official said.

China’s online P2P platforms, which match borrowers and lenders, have boomed rapidly over the past few years as borrowers — including small companies that lack sufficient assets and collateral to get bank loans — have flocked to the platforms. The sector has also attracted savers hoping to earn higher returns than they receive from standard bank deposits.

However, the industry’s reputation has been tarnished, and the confidence of both borrowers and lenders has been in decline, as a lack of regulation and supervision has resulted in a proliferation of risky lending and fraud.

The source from NIFA said the online lending sector has been plagued by fraud, such as cases in which managers absconded with client funds, primarily because of a lack of a stringent custodian system.

Regulators laid out rules in February, requiring lending platforms to appoint commercial banks as custodians to prevent the misuse of funds. But banks often pay lip service to cooperating with P2P lenders, ignoring violations including P2P platforms facilitating transactions whose size is over the regulatory limit.

Bank managers believe the risks associated with the online marketplace lending sector might outweigh potential benefits, according to several bankers and P2P firm employees.

Tighter regulations over the custodian services are expected to mitigate the moral hazard of the P2P lending sector, reducing the possibility of embezzlement, said the source from the NIFA. But the online lending and borrowing business is risky in itself, and the regulator does not allow P2P companies to offer an implicit guarantee for any losses from online lending.

As of the end of September, 541 online P2P platforms have deposited investor funds into a custodian bank, representing 27% of the total number of P2P companies that are operating, according to WDZJ.com, a website that tracks the online lending sector.

Contact reporter Dong Tongjian (tongjiandong@caixin.com)