P2P lending platforms feel the pressure as regulators squeeze them out of the market

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Pressure on China’s peer-to-peer (P2P) lending platforms is likely to continue to year-end, analysts say, adding more uncertainty to an already embattled sector. More than half of all companies have been pruned from the market since regulators introduced tougher rules aiming to clamp down illegal and risky lending practices.

The crisis reached a new peak in recent months as regulators continue to force out operators and a number of top players pivot away from P2P lending business.

“[The regulators] are shutting me down before I even enter the door. What do they want to achieve?” Li Yonghui, chairman and CEO of Fincera, said at a press event in Beijing on Wednesday, addressing the company’s plans to sell billions worth of assets.

Fincera launched its P2P lending platform Qingyidai (also known as CeraVest) five years ago in Shijiazhuang, Hebei. The company claims to hold 90% of the market in the province. Li said his company had been serving small- and medium-sized businesses across the country.

Fincera is relocating to Beijing and auctioning off RMB 7.5 billion ($1.06 billion) worth of assets, including the Kaiyuan Finance Center, the tallest building in Hebei that houses its headquarters, in order to provide liquidity to support its current operations and serve as a rainy day fund to protect investors interest should it come to the worst caste scenario—shutting down the platform.

Last week, the company said in a press release that all businesses operating within the P2P lending industry in Hebei, including itself, received requests from the provincial government to cease operating.

The company told TechNode in an email that it has faced continuous “unfounded opposition” from the Hebei provincial government.

Industry-wide consequences 

The government crackdown extends much further than just Fincera. Dianrong, one of the largest players in the sector, was planning to shutter two-thirds of its offline branches and lay off 2,000 employees in March. Meanwhile, Shanghai-based Zendai earlier this month abruptly closed down two P2P lending units said to be worth RMB 10 billion.

Most shocking of all is perhaps the impact on Ping An-backed Lufax, the country’s largest P2P lending platform. The company announced (in Chinese) last week plans to scale back its P2P lending business significantly. As of the end of June, Lufax’s outstanding loans stood at RMB 98.4 billion.

Zennon Kapron, founder and director of Shanghai-based financial industry market research firm Kapronasia, told TechNode that he was surprised to see companies like Lufax begin to pull out of the space.

However, he added that it doesn’t make sense for the company to keep P2P lending in its product portfolio as this might jeopardize the company’s pursuit of an initial public offering. The fintech company has been focusing on diversifying its products and developing more wealth management products.

Meanwhile, New York-listed PPDai and 9F, which debuted on the Nasdaq last week, have taken measures to increase the percentage of funding by institutional investors significantly in order to better cope with regulatory scrutiny and economic uncertainty. 

More consolidation expected

“P2P lending can be easily affected by regulatory and macroeconomic factors, which will continue to contribute a lot of uncertainties to the industry’s overall development,” Xue Hongyan, director of the internet finance center at Suning Financial Research Institute, told TechNode.

“Overall, the ongoing consolidation will extend into the second half of the year, a lot of small- and medium-sized businesses are expected to exit,” Xue added.

Officials gave a clearer direction regarding their efforts to regulate internet lending in July, according to Yu Baicheng, head of research at 01Caijing, an internet finance research firm. Regulators plan to continue to focus on lowering risks and supporting platforms’ exit or transition from P2P lending, said Yu. 

Towards the end of the year, more eligible platforms are expected to be included in the trial registration program, which will require platforms to register on a monitoring system and provide detail reports about their operations. The platform will also be expected to meet strict licensing requirements including having risk reserves equivalent to 3% of the lending made on the platform and setting aside funds equivalent to 6% of each borrowing as loan loss provision. The program is expected to be rolled out nationwide by 2020.

Platforms need to meet certain requirements like asset conditions and operational capability in order to exit or make a smooth transition responsibly, Yu added. Many P2P lenders have collapsed in recent years, without returning investor funds. It is usually a complex process that involves the platform itself, regulators, shareholders, borrowers, and lenders, said Yu.

Regulations are having an intended impact on the industry that grew out of proportion due to lack of oversight, and experts agree that consolidation is necessary for the industry to get to a healthy state.

The real question is where the government feels the sweet spot is, Kapron said, and that remains to be seen.