Private online lending deserves credit(2)

Why, how they work

The idea behind the Chinese sites is that borrowers who were neglected by traditional banks can find money while lenders can earn higher returns than saving their money in a bank.

"Unlike many Prosper and Zopa users who borrow money to pay off their credit cards, a majority of Chinese borrowers use our service to borrow money for their small businesses," said Zhang Jun, co-CEO of ppdai.com.

The site says it is the first Chinese peer-to-peer loan organization. Launched in August 2007, it now has more than 650,000 members and has facilitated more than 200 million yuan in loans so far, Zhang said.

He said about 40,000 to 50,000 of the members are active users. Many who registered did not provide the documentation to verify they were qualified for a loan.

Borrowers on P2P websites post how much money they need - up to 200,000 yuan on ppdai.com - along with the purpose of the loan and what interest rate they can afford. The interest rate cannot exceed four times that of bank loans, under an existing rule on lending by the Supreme People's Court.

Lenders bid to make the loans, typically funding only partial amounts and diversifying their risk among dozens or hundreds of loans. The minimum bid is 100 yuan on ppdai.com.

Growing fast; risks

"Since 2009, we will find new P2P lending websites launched every now and then, and some disappear a few months later, " Zhang said.

One of the survivors that is doing well is renrendai.com, which was started in October 2010 in Beijing. "Business started to pick up since the 2011 Chinese New Year," said its director of operations, Yang Yifu. "Right now, our business is growing at a speed of 20 percent every month."

Yang said renrendai.com helps facilitate an average of 10 million yuan in loans every month among its more than 110,000 users.

The fast growth of these intermediary websites during a time of tight credit has caught the attention of financial regulators.

In August, the general office of the China Banking Regulatory Commission issued a notice of risk alerts for peer-to-peer lending. It reminded traditional banks to establish a firewall against these intermediaries and to tighten their management of banking practitioners.

"Media reports have revealed that money from the banks was flowing into the private lending business. The notice is to remind banks to pay attention and not let the money flow into this new form of private lending," said Bai Chengyu, secretary-general of the China Association of Microfinance.

Among the association's 97 members from 27 provinces, four are P2P lending platforms. Other newly launched websites are applying to join.