China’s ‘Big Four’ banks still keeping a safe distance from burgeoning peer-to-peer lending sector

By next August all P2P platforms must have a custodian bank. So far, just 74 out of the total 2,534 in operation have done so.

PUBLISHED : Wednesday, 14 December, 2016, 2:56pm
UPDATED : Wednesday, 14 December, 2016, 10:51pm

China’s major banks are seemingly taking a “wait-and-see” approach to being future custodians for the nation’s growing number of peer-to-peer (P2P) lending firms, whose reputation has been hit hard by a series of high-profile fraud cases.

P2P lending platforms act as intermediaries that connect people with small sums of spare cash to people in need of small loans. As unlicensed, non-financial firms, they cannot sell investment products, collect deposits or pool the funds they take in.

A custodian is a financial institution that holds customers’ securities for safekeeping to minimise the risk of their theft or loss. Securities and other assets can be held in electronic or physical form and since the custodians are responsible for the safety of assets and securities that may be worth billions of yuan, they generally tend to be large and reputable firms.

By law, all P2P platforms now need to have the backing of a registered bank by August 2017, after being given effectively a 12-month grace period to meet the mandatory requirement.

Outstanding credit in the P2P industry stood at 800 billion yuan by the end of November, according to data from, a website tracking the industry, giving an illustration of the scale of the capital needing to be put under custody.

So far, however, the country’s so-called “Big-Four” state-owned banks are yet to act as custodian to any P2P platforms, with only smaller lenders – mostly city commercial banks – dominating the segment.

Since August, the banking watchdog, the China Banking Regulatory Commission (CBRC), and other authorities have jointly released a series of measures, which have now formed the first legal framework towards regulating the sector, which included the requirement to have the backing of a registered lender.

The custodian obligation was made to guarantee that investors’ capital was not fully in the hands of the platforms, shutting the door, for instance, to them misusing investors’ hard-earning savings.

It’s quite right that it’s up to the banks themselves whether they decide to tap into the segment, depending on their different capabilities and market positioning
Lu Minfeng, secretary-general, Jiangsu Internet Finance Association

Lu Minfeng, secretary-general of Jiangsu Internet Finance Association, said it’s quite right that regulators should order the mandatory use of custodians to protect investors in the still-evolving P2P industry, which has already seen more than 3,000 platforms closed since 2011 – a higher figure than existing P2P lenders operating in the market.

“However, it’s also quite right that it’s up to the banks themselves whether they decide to tap into the segment, depending on their different capabilities and market positioning,” he said, admitting that many P2P platforms have been given the cold shoulder by some recognised banks.

The custodian rule was among a nationwide overhaul of the whole internet finance sector launched earlier this year to stem illegal fundraising and other irregularities.

Pan Gongsheng, deputy governor of the People’s Bank of China, who led the multi-agency crackdown, said the campaign has already borne fruit in the form of a reduced number of frauds reported, according to the central bank’s website on Monday.

Globally, too, regulators have been tightening their scrutiny of the internet financing sector.

On Friday, the UK Financial Conduct Authority, for instance, said it was planning a new set of rules governing the country’s own loan- and investment-based crowdfunding industry, including much stricter disclosure rules on investors.

P2P platforms have mushroomed in mainland China since 2007, as household or small- and medium-sized companies found it an easier method of raising funds, especially those that had been declined by commercial banks due to a lack of credit history or collateral.

Its rampant and unregulated growth, however, was closely followed by a spate of scams, including Ezubao – once claimed to be China’s biggest P2P platform, but which turned out to be a giant Ponzi scheme that scammed over 900,000 small investors in less than two years out of 58.2 billion yuan, according to the Supreme People’s Procuratorate data. The lending platform had promised investors above-market returns of between 9 and 14.6 per cent.

Shi Pengfeng, chief executive officer of, said the country’s large banks are still highly concerned about getting involved in P2P lending, largely thanks to horror stories such as Ezubao and others, and because of the industry’s relatively small scale compared with their current mainstream businesses.

“It [the big banks’ lacklustre stance] goes against their regulatory intention to some extent, but it’s also difficult for the authorities to push all banks into taking on the business,” he said.

Xu Jian, dean of Lawyer College at Renmin University, said the big banks would have to factor in system development costs – in terms of capital, time and manpower – as there is still no “one-size-fits-all” model, on which the many different platforms operate, many of whom range hugely in size and complexity.

But more fundamentally, Xu said, is the reputational risk and possible repercussions that exist. The banks that have become involved in the sector actually bear no legal obligation to the platforms, even if they default, as long as banks fulfils its custodian obligation.

Custodian charges vary among banks. They can include one-off system-entry fees of 300,000 to 500,000 yuan, annual system maintenance fees of 100,000 to 200,000 yuan, plus custodian commissions equivalent to 0.15 to 0.2 per cent of the capital involved.

It [the big banks’ lacklustre stance] goes against their regulatory intention to some extent, but it’s also difficult for the authorities to push all banks into taking on the business
Shi Pengfeng, chief executive officer,

Some banks even demand extra custodian charges, if the amount being covered falls sharply, to ensure their costs are at least covered.

But as the big banks hold back for now, the smaller banks have been eager to open their doors to P2P business, albeit in a cautious way.

Wang Tao, assistant to the general manager of digital banking at Huishang Bank, said the Hong Kong-listed lender has witnessed a sharp rise in demand from P2P platforms, to fulfil their mandatory requirements.

“We will undertake the process at our own pace, rather than dashing to meet their demands,” he said, adding that “risk-cushion measures” – such as a set deposit amounts – are needed.

Wang said around 400 P2P platforms have expressed their cooperation to meet the higher capital demands, but still less than 10 per cent of agreements have actually been inked in the past 18 months, as the bank takes a prudent stance.

Some of the sector’s front-runners, however, had already sensed the need for bank custody long before it became mandatory, in an effort to beef up customer confidence in their offerings.

By the end of November, some 3,345 P2P lending platforms had closed or reported problems such as disappearing savings, while the number of existing platforms has shrunk to 2,534, according to, which has been tracking the sector since 2007.

By December 2, it estimates 74 platforms had introduced a bank custody system, accounting for just 3 per cent of the industry total.