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People's Daily Online>>China Society

Private online lending deserves credit (4)

By Duan Yan (China Daily)

10:18, January 31, 2012

No one in charge

None of these lending sites comes under the scope of financial regulatory agencies. The banking commission also warned that during times of tight credit, such websites could be turned into illegal financial institutions if they solicit investments from the general public.

"The lack of a well developed credit system also has pushed many such websites to go offline to attract users and provide other services," Bai said. "The problem arises when a peer-to-peer lending company does not just connect lenders and borrowers."

In China, P2P lending platforms have moved beyond emulating the foreign sites. Some sites charge a fee to provide a credit guarantee for borrowers. Some lend their own money to borrowers and transfer the creditors' rights to investors. In that case, Bai said, "They changed from an information intermediary to a player in the game."

All these companies are providing innovative financial services without a license. "It's like driving a racing car on the street without a driver's license," said Chen Guang, a lawyer at Zhong Yin Law Firm. "As the money pool grows bigger, it becomes riskier."

Chen said these websites could also become a money-laundering channel for illegal activities.

In September, the founder of the P2P site was arrested on suspicion that he borrowed money from other lending sites without paying it back and used that money to set up his own site to attract investors.

What might help

Despite the risks and challenges, Bai thinks the lending websites should be encouraged. "We should give some credit for their financial innovation. Financial policies and regulatory authorities should take a positive attitude toward them and develop targeted policies for regulation."

China's central bank has a team drafting a lenders' law to establish a legal framework to regulate private lending.

Bai and founders of P2P websites suggested that China's financial regulators lower the threshold of getting a financial license so these companies could operate within proper regulations.

"Regulation will be good for the future growth of the fledgling industry," Renrendai's Yang said. He said P2P websites have explored ways to create their own system of risk control and credit rating, and in the future, it will also be helpful to the development of credit rating in China.

"No matter how the future looks for these P2P lending platforms, as a financial innovation, they have played a huge role in the promotion of a multilevel credit market and the building of inclusive financial systems," Bai said.

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