Risks lurk in P2P lending sector, ratings agency warns

By GAO YUAN (China Daily) Updated: 2015-01-22 07:29

Some industry insiders expect global P2P lending to grow to $1 trillion by 2025.

"In the US, P2P financing mainly serves individual consumers to pay back their credit card loans, and in the UK, consumers borrow from P2P platforms for buying a house or car," Sun says.

But in China, another issue that pushed the rapid growth of P2P lending is the difficulty Chinese small and medium-sized enterprises have in getting financing from Chinese banks, which traditionally have favored lending to larger, state-owned enterprises.

"For many SMEs and family businesses, they are already seeking alternative channels of financing after discovering the difficulty of borrowing through the traditional channels, such as borrowing from family and neighbors," Sun says.

After working at China Minsheng Bank, Sun decided to establish his own lending company.

He says Chinese P2P firms can learn a lot from their UK counterparts in developing a good Internet platform to facilitate P2P financing and also building up a good regulatory environment to help create a level playing field.

"P2P firms in the UK place a greater emphasis on the Internet, so the lenders and borrowers can communicate in an efficient and transparent way. Internet platforms also enable extensive information disclosure for lenders and borrowers to make informed decisions," Sun says.

He says in China, much of the P2P activity still takes place offline because many companies have not invested in technologically advanced platforms.

"In the UK, the online system will determine whether to lend to an applicant or not based on a set of data input, but in China this decision will be made by a few people sitting at a table having a discussion. This means in China, the decision made could be more arbitrary and the use of labor input is inefficient."

Also, Sun says the lack of a good regulatory environment is also a challenge in China, because P2P companies as a result engage in practices unacceptable by industry standards.

The UK's P2P industry is regulated by the Financial Conduct Authority, which implements rules addressing the specific risks and operational features characteristic to the industry. But in China, there is no regulating authority or concrete rules governing the industry.

Sun says one example of an unacceptable practice common in China is to create a cash pool where all money is being gathered into one bank account and lent to different borrowers.