P2P lending: early warning signs

A storm has erupted over P2P (peer-to-peer) lending in China, FT  reports.

P2P platforms offer higher returns for savers. They do so in two ways. First, they identify borrowers who are willing to pay high rates because they do not have access to formal lending channels. Secondly, they reduce the intermediation cost- there are no branches and large staff that these platforms have to pay for. These platforms claim to have evaluated borrowers by using big data.

Alas, matters are not that simple:

Within the past year, ordinary Chinese people have fallen victim to scandals in which online financial platforms have disappeared with billions of dollars, provoking angry protests on the streets.

In February, more than 20 people were arrested for their involvement in Ezubao, a “complete Ponzi scheme”, that allegedly took more than Rmb50bn ($7.6bn) from investors, China’s biggest case of financial fraud to date. A month later, a court in southern China jailed 24 people for defrauding about 230,000 investors of nearly Rmb10bn in a similar scam.

In response to such problems, the regulator last week issued rules forbidding online lenders from accepting deposits or guaranteeing principal or interest on loans they facilitate. It also capped borrowing at Rmb1m for individuals and Rmb5m for companies.

One of the China's best known businessman calls P2P lending a "scam".  Looks as though those who think banks will disappear because of the arrival of such platforms need to wait for a while.