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Non-bank lenders back in the game

P2P platforms keep funds flowing for small businesses, but spectre of shake-out looms

PUBLISHED : Monday, 16 December, 2013, 4:28am
UPDATED : Monday, 16 December, 2013, 4:28am

Private non-bank lending in China is once again in full flow.

After nearly two years riding out the mainland's underground banking woes, person-to-person lending platforms have regained their vitality and are throwing cash-hungry small businesses and individuals a new lifeline.

There are now about 800 P2P online platforms dealing with matchmaking businesses for lenders and borrowers. These activities support the small private firms that are victims of the mainland's unbalanced financial ecosystem.

Among them, Dong Jun, founder and chief executive of jimubox.com envisions a "big thing" that could eventually break the monopolies of the state-owned banks. "The financial system in China is still problematic," Dong said. "It creates great opportunities for us to grow and become a powerful lending business in future."

Mainland banks are reluctant to extend credit to small businesses for fear of creating a bad debt problem for themselves owing to the lack of financial firepower in the small business community.

The formerly illegal underground banking practices were rampant in Wenzhou, with intermediaries raising funds from wealthy people before lending them to cash-strapped small businesses. The system collapsed in late 2011, battered by economic turbulence at home and abroad.

The crisis, however, did not stop private lending - or lending through the non-banking system - from operating. The P2P micro-finance platforms, banking on the increasing popularity of the internet on the mainland, have mushroomed in the past two years.

"Risk control is the name of the game," Dong said. "The financing demand is still there and the potential is huge to tap."

Under Jimubox.com's business model, no transactions can be conducted without a loan guarantor. The use of the guarantor incurs extra costs on the borrowers as they have to pay the guarantors' fees, but Dong said it was necessary for long-term business sustainability.

"I can't rule out the possibility of defaults, but we try to minimise the risks," he said. "But if the money is used for supporting the real economy, I believe the P2P platforms will have a bright future."

Since it became operational in August, jimubox.com has conducted total loan business worth more than 100 million yuan (HK$126 million) and the chief executive, formerly a Wall Street banker, targets a business size of more than one billion yuan next year.

But there is a catch. On the mainland, P2P platforms are now exempt from regulatory oversight, and the players normally set up the matchmaking services at the business-registration agencies as consultancies. But regulators have cautioned that risks are likely to arise from uncontrolled growth of the P2P platforms and their businesses and have yet to issue detailed policies on regulating the market.

"My observations are that some 'bad boys' are playing a risky game that is likely to trigger a new crisis similar to that in Wenzhou," said an official with the China Banking Regulatory Commission Shanghai branch.

"Some of the bold players are like loan sharks as they use the platforms to raise funds while lending to businesses and individuals at lofty interest rates."

The annualised interest rate on the P2P platforms could hit as high as 15 per cent, nearly five times the benchmark rates guided by the central bank.

"It is likely that 70 to 80 per cent of the existing P2P players will go bust in the next two years amid a lack of risk control and blind business development plans," said Gregory Gibb, chief executive of Lufax.com the P2P business of Ping An Insurance.

"Eventually, it will be the players who strictly follow the rules and efficiently control the risks that will win."

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