image:ppdai.com

Over 2000 online peer-to-peer funding services reportedly have processed 20bn Yuan ($323mn) worth of transactions in this year, twenty times of that in last year (report in Chinese).

PPDAI, founded in 2007, is the first one in this market, having received Series A  funding from Sequoia China earlier this year (report in Chinese). After registering to it, lenders put up money and bid for borrowers who have posted target figures. Borrowers, based on contracts, can borrow 3- 500 thousand Yuan and should repay in 6-12 months . No collateral or bank guarantee is required. PPDAI takes commissions.

The company, authorized as a third-party business on financial information and services, adopts Alipay to take care of capital and pledges not to receive or lend money themselves.

Doing differently, Hong Ling promised to pay for delays or defaults from its beginning in 2010. It even set up a credit guarantee company to take care of those issues. A lot of others followed Hong Ling’s way, not PPDAI’s, that, unsurprisingly, would attract more lenders. But PPDAI insists in being a platform that would not touch users’ money.

Chinese SMEs have been depending on private lending. They always turned to family, friends or even underground financing. The state banking system has never been friendly to them, though the central government started paying attention to the SME credit crisis.

The P2P online lending, if working well, does provide average entrepreneurs with more choices, easier access and transparency. For lenders, returns gained can be much higher than depositing money into banks — according to Chinese laws, interest rates of private lending must be less than four times of that for bank loans. To attract investors, some platforms even offer a reward of 1-2% of lender’s total investments.

Absence of Regulation

So far there is no either regulations or regulators in place. With 2000 unregulated players in the market, fraud is a huge concern. There has been a handful of reports on frauds.

Also it’s very risky for service operators and lenders as 1) no guaranteed collateral is required from borrowers; 2) entry bar is low. Required registered capital is as low as 100 thousand Yuan ($16,000). Bad debt ratios vary widely, from 1% – 10% with an average of 3%, according Xu Hongwei who runs a news service for P2P online lending.

25 services attended a self-organized conference last week and agreed on a couple of self-regulation practices, including 1) don’t receive savings or making loans; 2) don’t use investors funds; 3) promise not to borrow  money from their own platforms, and so on.