Blockchain isn't only about supporting cryptocurrencies like bitcoin or ethereum. Dianrong, a Shanghai-based P2P lending platform, is tapping the distributed ledger technology in an attempt to boost supports for cash-strapped small businesses. In doing so, it's hoping to find a transparent and efficient way of building its share of China's vast non-bank lending industry, at a time when regulators are putting shadow banking under the spotlight.
Dianrong has developed the new Corda app (“CorDapp”) which leverages R3’s blockchain technology platform.
For investors, blockchain puts the small businesses, the P2P investors and regulators all on the same page. With a low-cost and decentralised-ledger approach to managing information, the technology gives all parties instant access to information in an encrypted format, and it creates an audit trail each time data is changed.
The company matches online lenders and borrowers, providing loans of up to Rmb1 million ($156,000) for small businesses. It said the new app would deliver an efficient and secure access point to Dianrong's end-to-end, blockchain-based supply-chain finance solution. It will also, according to Dianrong, ensure transparency among counterparties.
Matching services such as Dianrong – as well as direct peer-to-peer lending services – are the latest iteration of China’s shadow banking boom, which has been filling the liquidity gap left by heavily regulated traditional lenders. Its latest innovation is a sign lending providers outside the traditional banking sector are still innovating as they seek growth, despite China's deleverging campaign.
To be sure, peer-to-peer lending organisations are under regulation, unlike some parts of the broad shadow banking sector. In Diarong's case, this is by the China Banking Regulatory Commission and the Shanghai Financial Services Offices.
"Today, only 15% of micro and small businesses have adequate access to credit. This funding gap is particularly evident in large, complex supply chains where small business owners struggle to get the basic financing they need to operate,” said Soul Htite, executive chairman of Dianrong
Founded in 2012, the Shanghai-based company raised $70 million in January from an additional series D round, that followed an initial $220 million series D round in August 2017.
When asked by FinanceAsia whether his company was interested in merging with rivals — a common trend among start-ups, not least in China — Htite would not speculate. But, he added: “As the internet industry has reached a level of maturity, consolidation in inevitable and that’s what we’re seeing.”
He said the fintech and blockchain innovation were key to bridging the funding gap in China and would build transparency and trust across global supply chain finance processes.
“Dianrong has made the strategic decision to further expand our supply chain finance network to make it easier for partners worldwide to adopt our solution,” he said. “R3’s proven Corda platform will help provide the scalability, customisation and global reach supply chain finance demands.
“Through CorDapp, we can make this solution even more accessible and easier to use for supply chains in China and around the world,” he said.
REGULATION
Htite said he saw regulation around shadow banking as a positive development.
“Currently those small loans and guaranteed companies in China are not reported anywhere,” Htite said. “Regulating those companies will help reduce systemic risk in the banking system in China.
“The shadow banking business in China is about a $5 trillion industry, an ocean for many online lenders to tackle,” he said.
Loan originations at the P2P lender, which is backed by the likes of TigerGlobal, ORIX, Standard Chartered Private Equity and Singapore state investor GIC, rose to about Rmb23 billion at the end of 2017, up from Rmb16 billion in 2016, according to Htite.
SHADOW BANKING
Regulators in China are grappling with what has been described as a ‘debt bomb’, cracking down on informal banking channels such as wealth management products and online lending.
As debt-reliant corporates – particularly in the real estate sector – are pushed to areas regulators can’t reach, shadow banking, which performs bank-like services but generally without any of the safeguards, has boomed.
While shadow banking is often more expensive than borrowing from China’s traditional Big Four banks, it does have the advantage of being quick, convenient and at least obtainable in a market where everything from bond financing to personal loans has been squeezed.
Despite the central government’s warnings, it appears shadow banking will remain a significant part of China’s financial system as innovative lenders use regulatory arbitrage to stay one step ahead of the authorities.
The figures for off-balance-sheet lending are huge.
According to the latest report from the Financial Stability Board, China contributed $7 trillion – or 15.5% – of the $45tn assets that make up FSB’s conservative definition of shadow banking.
