Internet technology can cause upheavals in traditional industries, making them look a whole lot different. Retailing, as we know too well, is one business whose face has changed due to the launch of Web and ecommerce initiatives. Right now, the same is happening to the finance sector.
Through internet, individual investors can now directly lend money to borrowers online, bypassing the middlemen—banks.
This so-called Peer-to-Peer (P2P) lending provides an alternative way for people to invest, while borrowers can get funding at lower interest rates.
Amid the increasing popularity of this P2P concept, US-based Lending Club — said to be the world’s largest P2P lending platform — filed for an initial public offering this week, aiming to raise US$500 million. Well-known institutional investors like BlackRock and T. Rowe Price Group are among those on the company’s shareholder list.
The deal will certainly be closely watched, as it marks the first online nonbank lender to go public.
In Hong Kong, the city’s first home-grown P2P player — WeLend — is also growing fast. The platform had already received HK$256 million (US$33million) in loan applications within seven months since its launch Last July.
However, the industry situation in mainland China appears to be chaotic.
Hongling Capital, one of the mainland’s largest P2P lending platforms, revealed bad news on Thursday.
Hongling director Zhou Shiping warned that the company has lent 100 million yuan (US$16.3 million) to four paper traders, debts which will probably turn sour. The borrowers are said to have committed fraud by using the same collateral repeatedly to obtain loans.
The group has lost contact with the paper traders. It is expected that the borrowers will fail to repay the loans when they become due next month.
If the loan turns bad as expected, it will be the largest bad debt in the China’s P2P lending market so far.
Loans from P2P platforms tend to be in small amount and for short period of time; the lending sites normally serve individuals and micro and small-size businesses.
Hongling, however, felt that the return from the above model was not attractive enough. So, it took a more aggressive approach. It invited bank loan experts to jump on the bandwagon, and started to lend huge sums to large borrowers.
To safeguard its reputation, Hongling is expected to take the blow itself so that individual lenders involved will be able to escape unscathed.
Hongling, of course, has made a serious strategic error, but the case also reveals the regulatory shortfall of P2P industry in China.
Chinese P2P firms’ quality can vary a lot. In the worst cases, some are simply fraudulent establishments. As many as 119 P2P lending firms have absconded in the past few years, siphoning off about 2.1 billion yuan (US$336 million) in total, according to Chinese media.
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