Peer-to-peer lending got quite some coverage in China´s media, both as a huge business opportunity, and as an attractive criminal operation ground, says financial analyst Sara Hsu in the Diplomat. Authorities have tried to crack down on crime, but are also afraid to kill a good business.
In general, regulatory crackdowns have centered around reducing risk. The landmark Guidelines Concerning the Promotion of Healthy Development of Online Finance, published in July 2015, emphasize risk control, and encourage industry self-discipline. Regulations put forth in December 2015 require P2P firms to register with local financial authorities and to publicly disclose loan performance. Regulations on non-bank providers of online payment services were issued in the same month to specify how funds would be treated. Many banks shut down P2P third-party payment services at the beginning of 2016 in order to control risks, but these payments have been gradually resumed. Regulatory supervision of individual P2P companies has also tightened in the past year.
The P2P lending sector remains popular due to funding shortages for micro- and small and medium-sized enterprises, and for lenders, for its relatively high rate of return. P2P sector interest rates reflect those obtained on the curb market (i.e., outside of the formal banking system) and are higher than those associated with bank loans, weighing in on average at 15-18 percent. As on the curb market, many borrowers lack credit history of collateral. Participating in the P2P sector allows borrowers to obtain loans where they otherwise would not.
Still, P2P sector participants are potentially exposed to business collapse due to liquidity shortages or fraud, both of which are relatively common. Unlike the formal financial sector, the P2P lending sector suffers from a lack of self-discipline. It is not uncommon for business owners to flee when a loan fails. Therefore, even as the P2P sector continues to grow, many such businesses fail, and regulators are attempting to discipline the sector in fits and starts. Addressing all potential pitfalls is a challenge, as is implementing specific financial requirements. Given the pace of regulation, however, one may expect tighter rules to emerge in the near future.
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