P2P sites are clicking with borrowers

Updated: 2014-10-29 07:11

By Zheng Yangpeng(China Daily USA)

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Online financing industry gets more support from investors, reports Zheng Yangpeng.

China's peer-to-peer lending platforms have emerged quickly. Unfortunately, so have the risks associated with such enterprises. Media reports have told of bosses of P2P firms disappearing after the lenders failed to give investors promised returns.

But industry insiders said such stories, though exposing hidden risks for China's burgeoning investors, lack basic financial risk literacy and understate the huge opportunities and progress the sector has brought to the nation's often bloated financial service industry.

Along with ever-evolving Internet finance offerings, P2P firms have brought investment options, once out of reach for the average Chinese, to investors who may have only a few hundred yuan to spend. It is akin to a financial Enlightenment, some said, a development that promises to push forward China's financial democratization.

What is more, though still small compared to the financial might of China's banks, the sector has challenged the dominance of the status quo, be it financial institutions, securities firms or insurers, experts said.

For the first time, ordinary Chinese know that they have somewhere to turn other than to banks when they have borrowing or lending needs.

The change is taking place at a dazzling pace. In 2012, there were only 110 P2P lending firms in China. By the end of 2013, the number had soared to about 700. And by the end of July this year, it surged to around 1,200, according to the China Banking Regulatory Commission.

How fast is that? It means 1.62 firms were born in China every day in 2013 and 2.38 per day this year.

In addition, some 190,000 people have borrowed through P2P websites, which attracted an estimated 440,000 investors, according to Rong360, an online loan product searching engine.

When so many people involved, the stakes are growing. But what has been underestimated is how much the massive influx of new players has driven up competition, with entrepreneurs having to innovate in order to overcome "distrust", a key obstacle to the industry's development.

Take Hexindai, a Beijing-based P2P firm launched in August 2013, for instance. Within one year, total turnover on the platform had reached 1.27 billion yuan ($207.5 million) and outstanding loans exceeded 300 million yuan. A reason for its success: Its operators have devised various ways to guarantee investors' interests.

First, unlike many other firms, Hexindai provides only asset-backed borrowing, with homes making up the bulk of the collateral. Shi Han, the company's general manager, said most of the borrowers are businesspeople with short-term financing needs. If they fail to fully repay their loans, their assets can be sold for repayment.

Shi, who previously worked for a large, collateral-free P2P, said: "Many P2P firms now offer loans without a collateral requirement. Although they have their own credit assessment methods, I feel that Chinese people still trust our model more."

The company also signed cooperation deals with third parties to accredit its electronic lending contracts and facilitate online payment.

Investors are mainly lured by high returns. In Hexindai's case, the annualized return is between 17 to 18 percent, compared with the 3.25 percent one-year fixed deposit interest offered by banks. Even that double-digit return is in the middle of the pack - many of Hexindai's peers offer a 25-30 percent annualized return.

So why do borrowers choose his company? The answer, he said, is simple: They get paid quickly.

Borrowers can get money in one or two days, whereas similar applications could take at least two months to be approved at banks.

"Many borrowers have an urgent financing demand. For them, the higher cost is OK. Unlike many peers, borrowers are allowed to repay only monthly interest before they pay off the principle. It is attractive to many businessmen," Shi said.

To cover the possibility of bad loans, the company sets aside 1 percent of the outstanding debt to cover soured loans. The ratio seems low, but Shi said that, given the fact that among over 100,000 online borrowings so far, none has gone sour (only four offline borrowings became nonperforming), the ratio is reasonable.

There are other ways to protect investors. Yooli, also a major P2P website, connects investors with small-loan companies' clients. The companies can offer guarantees for their recommended clients. In return, they circumvent regulators' stringent leverage requirements.

The model, now a mainstream practice among China's P2P firms, runs afoul of regulator guidelines.

One of the four general principles laid out by the CBRC in April is that P2P websites can only serve as a "pure information intermediary" and cannot offer a guarantee for loans.

Other principles include a ban on P2P platforms to cultivate capital pools, as the regulator fears the scope would expand beyond individual and small business borrowings.

Wu Xiaoling, dean of the PBC School of Finance at Tsinghua University, put that concern bluntly: "Many P2P firms have become indirect financing vehicles for large projects. Very few platforms stick to the principle of serving small businesses only."

P2P firms, meantime, have their own concerns. It is increasingly difficult, they said, to be a "pure information intermediary" to attract investors, especially given that firms created by established banks or insurers offer much stronger assurances.

Harsh competition has already driven out some players. The CBRC said the heads of at least 150 firms this year have vanished.

But Shi insisted that although consolidation might be inevitable, P2P firms can survive by finding a niche market.

Zhengedai, a new loan product-searching website, serves as an example. Lenders can compare prices and identify suitable products from thousands of loan products by answering an online questionnaire.

An Xiaoyu, founder of the venture, said banks' shortfalls are what prompted him to set up the business.

A former loan officer at a major commercial bank, An found that a large number of people did not know where to get a loan, even though they were qualified applicants.

"Many people turn to intermediaries because they feel it is too hard to get loans from banks because of their complicated formalities," An said.

So far, the highly anticipated national P2P regulations, which are expected to draw the boundary of P2P firms' practices, have yet to be announced. Both An and Shi expected the day will come soon.

Shi said an urgent problem is the P2P businesses' lack of "status" - which means, in China's context, the regulator of these firms has yet to be confirmed, causing many operational problems.

"For example, say we want to find a bank to be a third-party custodian. But banks are reluctant due to our blurred status," he said.

Despite such problems, analysts said the rise of P2P firms, along with such emerging businesses as online payments, crowd-funding and online money market funds, has reshaped the mentality of investors, borrowers and banks alike.

"We know we are trivial compared with banks. But we hope that Internet finance can stimulate a new perception among the public toward financial services, just as the stock market did 20 years ago," Shi said.

"The hope is that banks will no longer make money lying still but standing up to serve customers. And we can make money kneeling before customers."

Contact the writer at zhengyangpeng@chinadaily.com.cn

P2P sites are clicking with borrowers

(China Daily USA 10/29/2014 page14)

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