Reading through a credit card statement can be a harrowing experience for over-borrowed consumers. For Renaud Laplanche, the Silicon Valley entrepreneur, it prompted a business idea. Looking at his own mail years ago, Laplanche saw that his credit card interest rate was listed at 17%. His savings account, meanwhile, earned just 0.5%.
The discrepancy inspired Laplanche to launch a platform that matched savers (punished by low interest rates) with borrowers (suffering from costly credit) via an online auction process.
The result was Lending Club, now a leader among the so-called peer-to-peer (P2P) lending platforms. Lending Club and its rival Prosper have 98% of the American P2P market combined, issuing $2.4 billion of loans last year, up from $870 million in 2012.
Indeed, it has proven such a success that last month Lending Club said it planned to go public on the New York Stock Exchange under the ticker “LC”, (known in financial cirrcles as the shortform for ‘letter of credit’).
Most of the promising dotcom ideas from America normally spawn clones in China, of course. For P2P it’s no different, although this kind of lending is already much bigger business in China than it is in the US. Industry data provider Wangdaizhijia (literally “home of internet loans”) suggests there were about 1,400 such micro-financing firms in operation by early 2014 and that loans are poised to reach Rmb100 billion ($16.3 billion) by the year-end, up from Rmb5.6 billion last year.
Early movers like CreditEase started as far back as 2006 (the same year Laplanche founded Lending Club) but the sector really got going in 2009, when monetary tightening by the central bank deprived many small and medium-sized private enterprises of conventional credit. Meanwhile, a combination of paltry saving rates, poor stock market performance and curbs on homebuying has been bringing more retail punters into the frame. Simply put, the returns can be enticing: Wangdaizhijia data suggests that last year about 87% of P2P investors received yields higher than 18%.
Such exceptional returns are linked to the fact that many Chinese P2P operators are providing a risky product. The Financial Times reports that several P2P platforms run by brand-name internet firms have been partnering with real estate developers to finance homebuyers unable to meet the 30% downpayments required for mortgages, for instance. In comparison, Lending Club, which is still lossmaking, focuses on borrowers with sound credit profiles. It has refused to get into subprime lending.
Not too surprisingly 74 platforms went under last year in China and at least 60 more have gone bust year-to-date.
In April rumours were rife that CreditEase, which has 13% of its Rmb50 billion in assets invested in real estate, was in trouble because one of its debtors had fled (see WiC234). It managed to survive that confidence crisis, however, claiming that jealous rivals were feeding false allegations to the media. But now another P2P operator is in crisis mode. Worse still, the collateral at stake is not bricks-and- mortar, but merely paper.
In August Hongling Capital, a Shenzhen-based lending platform, told police that it had fallen victim to a “fraudulent borrower”. Five papermaking firms raised up to Rmb100 million via Hongling but key executives at the companies in question had since gone missing. The papermakers are related companies controlled by a Shandong businessman called Hao Yiyuan, whom Hongling has been unable to contact since August.
What happened? According to Southern Weekend, the various paper firms have been issuing letters of credit to each other. This created the illusion that real trading was taking place and banks were happy to extend short-term trade financing (typically with a maturity of six months and at interest rates marginally higher than conventional corporate lending). But when Hao obtained a licence to establish a paper trading exchange in Guangzhou in March 2013, the start-up costs were greater than his cashflows could cover. That’s when Hao turned to Hongling’s lending platform for funds.
“It is the biggest default so far in P2P lending, and a vivid example of how bad loans from banks are being transferred to the internet,” Southern Weekend suggests, reporting that creditors have raided the warehouses of Hao’s companies, seizing up to Rmb20 million of paper products.
Trying to stem the reputational bleeding, Hongling pledged last week to compensate about 4,500 investors who have lent to Hao’s companies. But the default has nevertheless raised questions about Hongling’s own risk management processes. “It is rare to see fundraising bigger than Rmb10 million in P2P lending. A single case as big as Rmb100 million is unheard of,” Southern Weekend notes.
“Hongling has hired many executives from state lenders. It is moving closer to conventional banking and has been more aggressive on bigger financing deals,” it adds.
But some of the state lenders are now moving further into P2P financing themselves.
China Merchants Bank (CMB) launched its own P2P lending service in September last year and a deal brokered by CMB last month raised Rmb50 million in a single day, reports National Business Daily. That was achieved without any prior pre-marketing too.
Bank of Suzhou said last month that it is setting up a micro-financing division with Dianrong, a Shanghai-based P2P website.
Ping An Bank has set up its own P2P lending unit too.
“P2P lending helps banks to build a more complete business ecological system. It also meets the financing demands from their own clients, the small and medium-sized enterprises,” National Business Daily observes.
The trend also coincides with newfound willingness from the financial regulators to channel the idler pools of the country’s cash into more structured financing.
For instance, the People’s Bank of China has just given the green light for a mortgage-backed securities market, which may attract investment from various social securities funds (see WiC257). Pilot programmes have also been launched to allow savers to crowdfund projects ranging from movie productions to residential property development (see WiC255).
Regulators have so far been turning a relatively blind eye to P2P lending activity, although reports have suggested that the China Banking Regulatory Commission and the central bank will soon unveil more comprehensive regulations for the sector.
Nonetheless, the Economic Observer expects the industry’s prospects to brighten after new regulations come into effect, as stricter rules ought to push less competitive lenders out of the market. Changes in the landscape may also prompt more interest from private equity firms in these internet financing platforms, says the newspaper, noting that more than 20 P2P lenders have already received private equity investment this year.
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