China’s Banks Weary of P2P Lending

China’s alternative lending market remains only a small fraction of lending in the nation, but experts say P2P finance is poised to become a viable threat to the traditional lending sector.

As experienced in many jurisdictions around the globe since the financial crisis, Chinese mainstream lenders are often weary of lending to SMEs, considered high-risk. P2P lenders have taken up that financing gap, and according to recent research, the market today has lent out about $53 billion in credit in China.

Part of the fuel behind the rise in P2P lending, experts say, is Big Data. Traditional banks continue to use internal rating and risk assessment systems, as well as business plan analysis, when determining whether to approve of a loan application. Alternative lenders, however, like Dianrong.com, use Big Data and computer algorithms to assess risk, based on a variety of aspects of an applicants, including personal data.

The penetration of smartphones and other technology in China has made the growth of P2P lending even easier, especially among the younger generation, reports said. According to P2P001, the number of P2P lending players in the nation more than doubled between 2013 and 2014; credit grew fourfold.

But the rise in P2P lending has led to some challenges. Regulators, for example, are tasked with balancing the growth that comes from businesses’ greater access to funding, but reigning in the unregulated shadow banking sector.

The influx of P2P lenders has also led to an influx of P2P lending closures. According to reports, last December saw 98 P2P lenders shut their doors, more than the total number of P2P lending closures in 2013 combined. Nearly half of those closures last year were due to fraud.

“A lot of money is coming in quickly and [the platforms] don’t know how to manage it,” said Dianrong.com chief technology officer Ling Kong. “Without the right risk management and asset allocation, there’s also a lot of systematic risk.”

China’s central bank has paid close attention to some of the recent failures of the industry, and authorities are slated to introduce alternative lending regulations sometime this year. Still, many experts say alternative lending in China is positioned to threaten the dominance of mainstream banks, especially in the SME lending market.