Regulations set to standardise Chinese P2P lending

Despite last month’s reports on China suspending banking regulations, the Chinese Banking Regulatory Commission (CBRC) are planning to standardise the country’s peer-to-peer lending industry due to the risks this type of lending could pose.

Peer-to-peer (P2P) lending is loaning money to individuals without going through a traditional financial institution and China is the largest P2P lending market in the world. However, large direct lenders being joined by smaller investors in a very lightly controlled environment has led to platform failures and fraud accusations, which is what has encouraged regulators to act.

According to English Chinese News Service (Ecns), the CBRC intend to introduce a registration-based system in order to ban financial products they deem to be high risk, which will mean P2P lending platforms will have to register with local regulatory bodies in order to operate.

Banks or third-party institutions will also have to act as a channel between both parties to ensure security. Alongside this, there will be a limit on borrowing loans of 20 million yuan or $3.2 million for a borrower from a single platform.

Zhu Mingchun, secretary-general of Guangdong Internet Financial Association told Ecns about other rules, such as raising the registered capital of the P2P platforms and banning products that aim to get funds for other companies. “The supervision aims to clean up fraud platforms as well as allow room for further developing the industry. We see the regulations to be launched by the end of June.

The majority of Chinese P2P investors seem to be individuals, rather than  institutions like in the US. This has increased the need for smaller businesses to have access to capital in a slow economy, a situation which has encouraged Chinese officials to take control of this form of lending.

Crowdfund Insider estimates that there are over 1500 active P2P platforms and over $8 billion in loans were taken out by lenders just in April 2015.

Around 235 platforms reported defaults or had difficulties allowing borrowers to withdraw cash in the first four months of this year, a decrease from the 275 platforms that had the same problem last year.