The China Banking Regulatory Commission on Wednesday released rules that aim to rein in the country's loosely-regulated online lending industry. The new rules strengthen risk controls over the online peer-to-peer lending industry, which has been plagued by all manner of problems, including cash shortages, defaults, fraud, closures and absconding executives. The rules also clarify the fundamental nature of online lending firms and prohibit them from making any implicit guarantees to their clients. They also require third-party banks to serve as the custodians, experts noted, effectively relieving the lending platforms of control over their users' funds.
Chinese regulators on Wednesday unveiled rules to curb the growing risks threatening the country's loosely-regulated online lending market, sending shock waves throughout the peer-to-peer (P2P) lending industry.
Investors in US-listed Chinese P2P firm Yirendai Ltd took the news hard. The company's share price plummeted 22.01 percent on Wednesday (eastern time of the US), finishing the week down 29.50 percent.
Due to the stock's plunge in value, law firms such as Law Offices of Howard G. Smith and Glancy Prongay & Murray LLP on Friday announced they would open an investigation on behalf of Yirendai's investors to determine whether the company or its managers had violated U.S. federal securities laws.
Analysts generally see the new rules as a major setback for Yirendai, which will be prohibited from offering certain high-return products to lure investors. One of the new regulations specifies that P2P lending platforms are not allowed to sell asset-backed securities or financial instruments such as insurance, trust products and wealth-management products. Those restrictions will derail Yirendai's plans, announced on March 1, to offer consumer loan products structured like other asset-backed securities.
Yirendai is just one of the 2,000 or so Chinese P2P platforms that will need to adjust their businesses to comply with the new rules. The China Banking Regulatory Commission (CBRC) has given online lenders a 12-month grace period to bring their businesses in line with the new rules.But the CBRC didn't mention how to implement the new rules and how to punish those who violate the rules.
As of the end of June, there were 2,349 P2P platforms operating on the Chinese mainland, according to a report released in early July by P2P information provider wdzj.com.
The new rules come after China's P2P lending industry has experienced a rash of cash shortages defaults, fraud, closures and absconding executives. During the first half of this year, 515 P2P platforms were shut down after executives fled, or after users had trouble getting their money back or for other reasons, according to wdzj.com.
By the end of June, there were 1,778 troubled P2P platforms in China, accounting for 43.1 percent of the total, according to the CBRC.
While strengthening risk control on P2P platforms, the new rules also clarify the fundamental nature of online lending firms as information intermediaries instead of credit intermediaries, prohibiting them from making implicit guarantees about their investments and requiring them to appoint third-party banks to serve as custodians of their users' money, experts noted.
Lending limits
In the Interim Measures for the Administration of Business Activities of Online Lending Information Intermediaries, one of the most notable parts is the limits on the amount that individuals and companies can borrow.
Specifically, the cap for individuals is set at 200,000 yuan ($29,989.50) from a single P2P platform and 1 million yuan from multiple platforms. Companies and other organizations are limited to borrowing up to 1 million yuan from one platform and 5 million yuan from multiple platforms.
Li Junfeng, director of the Inclusive Finance Department at the CBRC, said at a press conference on Wednesday that the Internet and big data technology can only be used in risk control and information gathering for micro-finance. However, large financing projects require on-site investigations and risk controls, which should not be handled by simply collecting online information and processing large amounts of data.
Looking at international practices, Li noted that some Western countries have set borrowing ceilings for online lending. For example, in the U.S., companies can borrow no more than $300,000 from P2P lending platforms.
"By introducing the borrowing limits, regulators intend to guide the P2P platforms to support inclusive finance, such as meeting the financing needs of micro-, small- and medium-sized enterprises (MSMEs), as well as individuals," said a manager surnamed Gao at a Shanghai-based P2P platform.
Because part of his company's business violates the new rules, Gao preferred to keep his full name and the platform's name out of print.
"Nevertheless, even for supporting MSMEs, the lending caps are quite low," Gao told the Global Times on Friday.
Many P2P lending platforms have let their users borrow way more than the new regulations allow. The website wdzj.com keeps data on the average amount of money borrowed by individual users on 851 P2P platforms. On 72.74 percent of those platforms, the average individual user had borrowed more than 200,000 yuan by the end of July, according to the site's data. On 46.06 percent of the platforms, the average individual user had borrowed more than 1 million yuan.
Domestic news portal chinatimes.cc on Saturday cited the example of a Shanghai-based P2P platform, which issued 116 million yuan in loans to 92 MSMEs in 2015, with the average loan amounting to 1.26 million yuan, well above the 1 million yuan cap.
Taking away the money
Along with the lending caps that are expected to curb the P2P lending business, the new rules also defined the nature of P2P platforms as information intermediaries, rather than credit intermediaries.
Theoretically speaking, classifying P2P platforms as information intermediaries means that they can't implicitly guarantee investors' money, which contradicts the current assumption that the platforms are responsible for investors' funds, said Luo Mingxiong, president of Beijing Jingbei Crowdfunding Technology Co and director of the Institute of Internet Finance at Shanghai Jiao Tong University.
Given the new classification, however, P2P platforms will no longer be allowed to directly or indirectly guarantee investors' principal and interest. They are also not allowed to pool investors' capital or use the money for their own operations, so they will need to set up custodial accounts at third-party banks.
Since the CBRC released the rules for public comment in December 2015, P2P platforms have started to get bank custodians. Yet, as of August 15, less than 3 percent of the P2P platforms had signed custodian agreements with banks, the Securities Times reported on Saturday.
Luo attributed the slow progress to banks' reluctance to provide custodian services to P2P platforms. "Previously, banks avoided P2P platforms because custodian account services are not particularly profitable for them," Luo said, noting that more importantly, banks were afraid that they might also have to take the responsibility for the P2P lenders' implicit guarantees if they provided the accounts.
"But the new rules now make it clear that the bank custodian doesn't offer any endorsement, which may encourage more banks to provide custodial services in the future."
