Peer-to-peer lenders claim to have enormous growth potential in Asia courtesy of their low costs and the region's huge demand for credit, which banks are failing to meet.
Speaking at Finnovasia’s "The Future of Fintech in Asia" conference on December 9 in Hong Kong, Mukesh Bubna, founder and chief executive of Monexo Innovations, said the P2P lending industry has grown at a rapid pace and will likely continue to do so in the years ahead as it expands from China to other markets such as India.
P2P lenders utilise an online platform to match up willing capital providers with individual or small enterprise borrowers for relatively small sums of money.
While Bubna declined to name a specific percentage growth rate for the future, he noted that P2P's lending volume in China was five times larger than it had been a year before, yet still only accounted for 0.25% of the country's money supply.
“P2P is the hottest action star in fintech,” Bubna said, citing World Bank estimates that there are 41 million businesses in Asia with no access to credit and approximately $300 billion of unmet credit demand.
Zoe Zhang, co-founder and CEO of GoLend.hk, was equally optimistic, arguing that P2P lending even in developed markets could easily grow by 10% to 15% per year.
Massive and growing demand for P2P credit and P2P business opportunities among both borrowers and investors has spurred some companies to gain market share through mergers and acquisitions.
Some of the biggest players, like Lufax and Dianrong.com, have also raised capital from investors and are making plans for initial public offerings.
Cost advantage
Zhang said P2P lending in China has boomed due to the terrible job local banks have done in providing much-needed loans to small-and-medium enterprises and because of the tremendous funding advantages enjoyed by online financial companies.
“[E-commerce company Alibaba’s online payments division] Alipay can charge a fee of 0.3% [for its services] whereas credit cards charge 3%,” she said.
The growth statistics surrounding P2P finance in China are impressive. In 2007 the country had just one P2P loans company. These days there are more like 3,000 platforms that have transferred more than Rmb300 billion ($46.58 billion) from lenders to borrowers, Zhang said, citing the last statistics she had seen.
But that is "still a tiny sliver of the outstanding loans in traditional institutions,” she added.
Bubna noted how technology titans like taxi app Uber, Alibaba and Facebook have emerged while owning no fleets of cars, no inventories and creating no content. Similarly, P2P companies are not burdened by the sort of demands made of banks, such as having to set aside 14% of their capital to create a lending buffer and the physical costs of branches.
As a result, they can offer provide better returns for investors who place money with them and provide credit-hungry borrowers better access to capital.
“Traditional lenders have operating expenses of 5% to 7% [of their revenues] if they are efficient,” Bubna said. “In Asia this is at least twice as expensive.” Compared to that the cost for P2P lenders might be 2%, he said.
The P2P lending rate in China has also been falling. “In 2013 it was 30%, in 2014 it became 15%. Nowadays it's around 12% and for big players like Lufax it can be 7% to 8%,” Bubna said.
Growing pains
While the growth potential surrounding P2P lending companies is huge, risks permeate the industry as well. China, in particular, has not regulated the companies sufficiently, leading to a situation in which almost anybody can set up a website and call themselves a P2P lender.
That has led to some fraud worries. Chinese media reported this week, for example, that one P2P lender Ezubo, which Zhang said has raised Rmb70 billion in the last two years, was being investigated by the police for alleged illegal business activities.
Meanwhile, as of the end of last year 367 Chinese P2P lending companies had gone out of business, according to analysts at Morgan Stanley.
Zhang acknowledged the problems, noting that almost 20% of existing platforms had suffered problems, which stemmed in large part from poor transparency and the absence of a unified credit assessment system in China.
Nevertheless, she argued that the reason the business is thriving in China is because most platforms offer guaranteed returns to their investors and demand collateral from their borrowers. “That is why P2P is succeeding,” Zhang said, while acknowledging risks, such as the use of the same collateral to underpin multiple P2P loans.
A new set of rules governing China’s P2P lending industry is also set to be announced in December or January. Market participants believe these rules could include demands for P2P loan companies to use a bank custodian to protect their depositors.
That is likely to weed out weaker and more questionable businesses and promote greater consolidation, as banks will inevitably only want to partner with companies they trust.
Hong Kong appeal
While mainland China is the market gaining the most traction, Bubna said Hong Kong also offered opportunities.
Unlike China, Hong Kong P2P companies do not offer guarantees on their loans. However, Bubna said it was also far easier to get information on borrowers due to Hong Kong’s credit bureau, “which is the best in the world,” he said.
As a result, he said P2P lenders can assess the risk of aspiring borrowers, along with their 'willingness' to pay back, which might change due to a shift in circumstance, such as losing a job.
Zhang has also focused her company on Hong Kong. “I invested in a lot of platforms in China and I think a lot of the problems they face are solved in Hong Kong, because it has more mature systems,” she said.
Both GoLend.hk and Monexo tend to focus on mortgage lending in Hong Kong, both because it is by far the most popular form of borrowing and also because it is based upon a physical asset.
Zhang said that while the valuation of many residential properties has risen sharply in recent years, banks are not necessarily willing to increase the amount they lend to existing house owners against these price rises.
That's what companies like Zhang's and Bubna's do; lend against the value of the property, which is easily ascertainable, based upon information from the Rating and Valuation Department, which keeps a public record of property sales.
Rate risks
Of course, even in a well-developed market like Hong Kong there are risks. Zhang said her company had not yet experienced any defaults on its loans. She added that the mortgage loans were often large at around HK$1 million ($129,000) and legally binding, so that GoLend.hk would be prepared to “pursue [the borrower] until bankruptcy. Nobody would choose this way.”
Bubna said Hong Kong banks have a 1.5% loss rate on portfolios, while moneylenders have on average a 3.5% to 4% loss rate on average. By comparison Lending Club, a major US P2P lending company, has a 1.5% to 2% loss rate.
It is much harder to ascertain the default rate in China due to a lack of comprehensive information. Loans are also guaranteed by the P2P company, theoretically meaning investors cannot lose their money. Instead, Bubna said that any losses are hard to track, with assets sometimes being transferred into newly-established companies.
And with the market expanding at such a robust rate he noted it is difficult to ascertain which companies are doing sufficient due diligence in their lending.
“China is growing so fast it's very hard to see; you'll only know the loss rate once the tide goes out and then you'll discover who is naked and who is not,” he said.
However, the industry's potential risks are rising along with the possible returns.
A sharp drop in housing prices might damage the business model and the expected rise in US interest rates this month and into 2016 will likely be followed by Hong Kong banks, increasing the rates depositors can earn with traditional lenders.
Funds placed with P2P lenders are also not covered by the Hong Kong Deposit Protection Board, which insures up to HK$500,000 of a customer's bank deposits.
In turn, higher interest rates are likely to increase the number of individuals or companies failing to pay their debts, not least among subprime borrowers.
Yet for all the risks it is hard to deny that P2P companies have helped match would-be borrowers not being well-serviced by banks with people willing to take a risk to put relatively small amounts of capital to work in return for an improved rate of return.
Not all these companies will succeed but a lot of people are willing to bet that this nimbler form of funding is going to give leaden-footed banks a run for their money.
