Traditional lenders feel the heat as P2P firms gain ground

Peer-to-peer lending companies are expected to pose a strong challenge to traditional lenders in China, as they continue to attract more customers and enterprise clients with lower financing costs, experts said.

P2P lending is the practice of lending money to unrelated individuals, or peers, without going through a traditional financial intermediary such as a bank.

By the end of July, there were 1,283 Internet lending companies and the transaction volumes of these companies will be around 250 billion yuan ($40.7 billion) by the end of this year, according to data from wangdaizhijia, a portal offering Internet lending information.

Transaction volume is expected to surpass 1 trillion yuan by the end of 2016, according to Tian Weiying, CEO of p2p eye, a portal offering Internet lending information and data.

Li Shiqi, secretary-general of the Beijing Credit Guarantee Association, said P2P companies will continue to attract more customers as the overall financing environment for small and medium-sized enterprises remains difficult.

Li Yaodong, research head at 01caijin, a portal that tracks Internet finance, said Chinese P2P lending companies were initially focused on individual borrowers and the funds were disbursed for purposes like education, shopping or small business. "Most of them have started to serve enterprise clients from last year," he said, citing the example of Shenzhen Hongling Venture Capital Investment Co Ltd.

According to Li from 01caijin, several P2B (person-to-business) companies have also come up in China since last year and the number of such companies that have disbursed loans of more than 1 million yuan each has crossed 10. Companies, such as Yindou, itouzi, jimubox, pccb and shicaidai, fall in this category, he said.

He said that P2P and P2B lending companies have made the lending process more efficient, and could pose long-term challenges to established lenders.

In the United States, the largest P2P lending company-Lending Club-filed an initial public offering application last month with the US Securities and Exchange Commission to raise $500 million.

As the P2P lending market further expands, funding costs will decline further, said Li Yaodong.

"Both the investment return rate for investors and financing costs for borrowers will decrease because of the expansion of the market. It will also make more funds available and improve financial capabilities of P2P lenders," he said.

Not surprisingly, the booming P2P lending sector has attracted some big investment institutions.

Legend Holdings Ltd has raised investments totaling tens of millions of yuan with two partners in Beijing Oriental Wealth Information Co Ltd, which operates the P2B plat form Yindou, the two parties jointly said recently.

It went online in January, and transaction volume has reached more than 200 million yuan by Aug 22. The number of registered users has risen to about 30,000.

During the first six months of this year, at least 10 P2P lenders received financing of more than 2 billion yuan from venture capital and private equity firms, according to Zero2IPO Group.

Tian said more players will enter the market soon to tap the huge growth potential.

"E-commerce platforms with enterprises' data have advantages of doing the business, and private finance groups are eager to go online to make them transparent," said Tian.

Ye Daqing, CEO of Rong 360, a Chinese online search platform for loan products, said some P2P lending companies have folded and more will do so because of intense competition. Some other firms may be acquired by larger players, Ye said.

"Industry leaders will dominate and account for 80 percent of the Chinese Internet lending market," said Ye.

There has been no regulations governing the P2P lending sector yet, but the regulator has given indications that it is taking stock of the situation.

An official at the China Banking Regulatory Commission said in April that the CBRC had started to study the regulations on P2P lending.

Li from the BCGA said P2P lending platforms are innovative finance options and need encouragement. However, it should be seen only as an intermediary and not as a guarantee for lending.

P2P lending platforms cannot cultivate capital pools and raise funds from the public, he said.

Li from 01caijin said P2P lending companies have to face technology and operating risks, with some companies having to undertake risk control measures.

Wang Pengcheng, CEO of Yindou, said the financing from Legend Holdings will be used to recruit risk control experts and improve brand management.