China’s peer-to-peer (P2P) lending industry has been in crisis mode ever since the government began to clamp down on it more than two years ago. Many smaller players have shuttered their doors as a result of industry consolidation. The more established platforms, even those with a pedigree, have not been spared from the aftershocks of the increased regulatory scrutiny.
On Monday, Guo Yuhang, co-founder of Shanghai-based P2P lending platform Dianrong, blamed the company’s slowing growth in the past two years was to the changing regulatory environment and the absence of clarity in policies, Reuters reported.
“It was not because we did not want to or could not grow. It was because we were told not to grow,” he wrote in a memo to employees, and he urged regulators to give the industry “a clear, and definite timetable, and give guidance and a ray of hope for companies that stick to compliance.”
Earlier this month, the online lender said it was closing 60 of its 90 brick-and-mortar outlets and laying off as many as 2,000 employees. Some employees accused the company falling behind on wages and severance payment. The company spokesperson told TechNode at the time that the job cuts and branch closures were part of the company’s response to the changing government policies and industry environment.
A week later, Guo confirmed to Chinese news outlets in an interview (in Chinese) that the company’s management-level staff had not been paid for two months. The company is short in cash and needs time to liquidate its assets, Guo said. Although it is taking longer for the company to liquidate its assets, Guo said the company expected the cash flow problem to ease by the end of June.
According to Guo, Dianrong will take steps to adjust its businesses, which include shifting its focus from offline to online, scaling back its prospective and non-money making projects, and adopting the management model of an internet company instead of a traditional financial institution.
Survival of the fittest
The online lending industry has entered “survival of the fittest” mode, Yu Baicheng, head of research at 01Caijing, Shanghai-based internet finance research firm, told TechNode.
For large-scale platforms with a solid operation and an established brand, Yu said the condition for survival is slightly better compared to their smaller peers. In the meantime, these platforms are trying to increase efficiency and reduce cost through technology, while waiting for industry rectification to come to an end and policies to become clearer, he said.
Regulators established a set of interim measures in 2016, which set the business scope of P2P lending businesses to be mere information intermediaries and require companies to register with local authorities. As part of the measures, provincial governments were also told to formulate regulatory policies based on local conditions.
Following the crackdown on online lending platforms in 2016, a specific timeline was set for the implementation—the overall rectification and registration should have been completed by June 2018 has been put off to this June.
Yu said China’s online lending platforms are part of the government’s rectification campaign to regulate the overall internet finance industry. “As part of the process, regulators have been asking platforms to take steps to reduce risks, scale back, and bring down loan balance,” Yu said.
The rectification has led to numerous platforms slashing jobs, scaling back their businesses and lowering costs, Yu said. Of course, there have also been many whose operations were under strain and decided to exit the industry and those that were found to be problematic and eventually collapsed, he added
Over 2,000 P2P lending platforms have either collapsed or found problematic from 2016 to 2019, according to industry intelligence site wdzj.com (in Chinese).
Among the Chinese online lending firms, Dianrong appeared as one of the better managed and more established, its recent financial predicament may seem surprising at first.
“The fact that they are now going through some challenges, is a really strong indication of how hard the government regulations are hitting the industry, both from the individual operations of the company and the industry as a whole,” said Zennon Kapron, director at Shanghai-based financial industry market research firm Kapronasia.
Regulators have ramped up oversight of the country’s online lending industry in a bid to reduce financial risks in the economy, and the regulatory shocks have set off an industry spiral.
In late 2018, Beijing began asking online lenders to cut back on their loan balance, their number of physical stores, and the number of personnel. This increasingly stringent oversight of lenders’ offline operations had a more significant impact on Dianrong whose larger percentage of assets are offline loans to small and medium-sized enterprises (SMEs), according to Caixin Global.
Not without warning
Dianrong’s liquidation issues did not come without warning signs. The company’s lending structure focused on loans with a repayment period of two years or longer, around 60% as of June 2018, which makes it difficult to liquidate its assets. However, according to January figures, the company managed to bring down its long-term loans to 18.5% and short-term loans—with repayment period less than a year—was around 75%.
“A couple of years ago it seems like they were planning for an IPO, they were investing in blockchain technology and expanding the business very rapidly,” Kapron said the company may have failed to see the market downturn coming as a result of regulations and may have overspent.
The overdue rate for Dianrong is also high compared with other established platforms. In January, Dianrong’s loan overdue rate was 9.9%, approaching the level that the government considers as “high-risk.” Chinese P2P lending unicorn Lufax recently disclosed its overdue rate to be at 2.3% in 2018, Renrendai also reported a lower rate of 0.18%.
Some industry experts believe that the consolidation will likely continue throughout this year and companies have to adapt to the regulatory environment if they want to survive. Kapron said the company could face increasing pressure from investors or even the possibility of a buyout down the road.
“If they [Dianrong] are able to downsize both asset base and its employee base to get to a point that they can still stand, they could survive,” Kapron said. “The question is would they want to in that environment and with that structure.”