Shanghai is the kind of city with a businessbuzz that sparks an entrepreneurial flame in many young people chasing their dreams. Ding Fengting, 20, a college sophomore from central China's Anhui Province, is one of them. During the past two years she has juggled her business passion with university studies while trying to find a gap for entrepreneurial ideas.
However, being cash strapped posed a major obstacle in her desire to launch an online shop selling trinkets. So, inspired by a roommate, she turned to Surong360 for the start-up funds. Through the online finance platform, she raised 3,000 yuan ($489.9), just enough to get her shop up and running.
"It just took two days to get it," Ding said. "The interest rate is lower from loan sharks but higher from banks, yet I couldn't get such a small amount of money from banks."
Thanks to the emergence of peer to peer (P2P) lending websites such as Surong360, small business entrepreneurs like Ding and individuals whose financing demands are rejected by banks have found a new way to solve their start-up financial woes.
Online micro-financing
Since the first P2P company, Paipaidai, appeared in China in 2007, the industry has witnessed a rapid expansion. According to China P2P Lending Services Industry White Paper 2013 issued on July 10, there were over 200 formally registered P2P companies by 2012, helping more than 50,000 investors.
A report by Haitong Securities noted that the P2P industry was worth nearly 60 billion yuan ($9.78 billion) in 2012.
Most P2P companies cater to people who seek relatively small loans, whether to attend school, buy equipment like computers or cell phones, or start a small business. After passing the website's credit assessment, registered users can post the amount required, reason the loan is needed, the repayment plan and interest rate desired to search for matching partners. The websites play the role of a go-between to connect borrowers with lenders and charges transaction fees for revenue.
Established lending websites such as CreditEase, Paipaidai and Surong360 say their average interest rates are about 20 percent, compared to Chinese banks' one-year deposit rate of 3.5 percent. "Although the rate is higher than that of banks, the platform offers a more quick and convenient alternative to get loans and needs no collateral," said Ding.
And for lenders, the rate is higher than depositing money in banks and there is no minimum amount requirement. "Individuals could make an investment on our platform even if they have only 100 yuan ($16.34)," Liu Zefeng, CEO of Surong360, toldChinAfrica.
As an emerging industry, online micro-financing has also attracted the attention of the government. In its second quarter monetary policy report released on August 2, the People's Bank of China gave a detailed elaboration on Internet finance and notes that its innovation on financing products and services fills the void of traditional banking systems.
"Internet finance, including online lending services, helps solve the information asymmetry and credit problems and provides more diversified financing products and services. These online platforms benefit small business owners and individuals as they reduce lending costs and disperse loan risks," said the report.
Risks
On the other side of the thriving, a gray area lurks in the online finance lending where there has been no consensus on which financial authority should oversee them.
"These websites are actually doing financial transactions, so they should be contained in the nation's regulatory system," said Wu Qing, a research fellow with the Research Institute of Finance at the Development Research Center of the State Council.
"Although they are not officially recognized by authorities, they are playing the role of mediating financial transactions and are capable of mobilizing considerable amounts of capital. So the risk of the lending service they offer cannot be overlooked," said Guo Tianyong, a professor with the Central University of Finance and Economics.
"The penetration of the Internet allows more and more people to have access to online financing. Among them, not everyone's credit can be guaranteed. The risks of bad loans and defaults are huge," said Guo.
Liu said there are also risks when P2P websites conduct offline lending services under the banner of P2P business. "Some have diverged and are no longer pure P2P companies as they have to promise to guarantee loans when offering offline services," said Liu, adding that the offline lending services are more risky and will threaten the sound development of this industry.
Bai Chengyu, Secretary General of China Microfinance Institution Association, expressed similar concern. "Turning from online to offline underscores advantages of the P2P lending service and increases transaction costs. Guaranteeing loans with no proper supervision adds risks to the P2P industry," said Bai, noting that doing business in this way may lead P2P companies to evolve into loan sharks.
The China Banking Regulatory Commission recently issued a notice warning that some P2P companies are evolving into illegal financial institutes soliciting deposits and even conducting illegal fundraising.
Credit rating
Surong360 maintains its simple function as a P2P lending service provider despite fierce competition and is making efforts to find a new way to cultivate potential clients with sound credit records, Liu said.
"Our way is to combine social networking with financing services and to restrict our clients to university students and graduates," said Liu.
In 2012, he took over Hahadai, a former P2P lending company that was bankrupt due to a shortage of funds in July 2011, and changed its name to the current Surong360.
"Firstly, Surong360 is a social networking platform where university students meet peers with good credit standing," said Liu.
"What borrowers depend on to get loans is their credit rating," he added. To get money through Surong360, one has to pass the credit rating assessment. Borrowers must provide their ID number and student ID information, as well as invite more than two classmates to record a video proving the borrower's status as a student.
"University students grow with their credit rating by making repayments on time. When they graduate two or three years later, they will have a solid credit standing, of which they could take advantage to pursue a better career or start their own business," said Liu.CA
∗houweili@chinafrica.cn
