China and P2P (Peer to Peer) lending

We hear lots about P2P and Crowdfunding models in both Europe and the USA.  No I am not talking Purchase to Pay solutions, my partner Jason Busch always reminds clients that P2P has a dual meaning.  It seems nearly every week, someone is raising capital or finding new institutional investor money to fund Peer to Peer lending assets. Just the other day, alternative lender FastPay, which specializes in lending to digital media startups, received $15 million from Oak HC/FT, a $500 million growth-equity fund.

But what is happening in China? According to KapronAsia, "in October, 38 platforms have been shut down, 17 of which people behaved fraudulently (45%) and 11 had capital shortages (29%). 38 shutdowns within one month is a record-high since P2P lending emerged in China."  This should be a warning for many investors. We know China does not have the same credit bureau data, infrastructure, and regulatory environment as OECD countries.

KapronAsia provided several interpretations for this turn of events:

Due to lack of regulation in China, P2P lenders conduct proprietary due diligence, which may not reflect the real risk profiles of the borrowers. Much of the fundraising for P2P lending platforms is illegal, which further invites fraudulent behaviour from P2P platform managers. In the face of such shutdowns, therefore, there is very little legal recourse for investors wanting their money back.

The WSJ recently reported that many “guarantees” for Chinese loans are worthless – See Loan ‘Guarantee Chains’ in China Prove Flimsy  So even loans that investors and banks had assumed were insured with guarantees are proving worthless.

China is not unlike the OECD market in the sense many feel the small business market has been ignored by traditional financial institutions who are not providing sufficient credit to this segment. The rise of P2P platforms, funded by venture capitalists who sense opportunities, flood the market with their various underwriting techniques deploying non traditional technologies. Many of these models are platforms that offload risks to investors and have no vested interest in the credit going forward.

As the China example indicates, caveat emptor!

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