By Li Hongmei
Dozens of peer-to-peer lending platforms have gone bankrupt in China since October, with the amount of money involved reaching 1 billion yuan (US$164.5 million), according to estimates by Wangdaizhijia, a Chinese peer-to-peer (P2P) online lending portal.
The recent slew of closures revealed hidden risks in lending money to unrelated individuals, or peers, without going through a traditional financial intermediary such as a bank.
This lending, which takes place online on peer-to-peer lending companies' websites, saw its popularity surge in China over the past two years, attracting users with its business model, where professional creditors lend to borrowers, who then pass the money on to investors, while charging high interest.
The platforms appeal to users by closely matching the needs of lenders and borrowers and saving the time needed for finding someone to borrow money from. Smaller companies are notably drawn to the P2P lending platforms as they have looser credit standards than traditional financial institutions for granting loans, which is convenient in times of urgency.
However, security stakes are high for P2P lenders. For instance, many of the borrowers on the platforms are among those who borrow heavily from traditional financial institutions, who seek to profit by charging high interest rates to investors. Such platforms also lack third-party regulators to oversee transactions, increasing the risks of operators running away with the money in circulation.
Meanwhile, many platform operators lack sufficient commitment to the management and development of technology to ensure the safety of transactions, which results in tardiness in responding to security breaches and hacking.
The government should now consider stricter regulations governing such online transactions. P2P lending platforms should be required to register themselves with professional institutions, with a certain amount of capital required for registration, to better protect investors. Strict assessments and reviews are needed for approving registration.
The platforms must also be required to hire professional managers and technical staff to ensure the safety of the system and to guard against any attacks from hackers. Constant inspections of the operations of the platforms by related authorities are necessary, as are heavy penalties for offending companies.
