Move will improve sector's stability: experts
China released on Monday a set of draft rules for regulating online peer-to-peer (P2P) lending platforms and is soliciting public opinions on the rules. Analysts said the draft regulations could help bring order to the booming but sometimes chaotic sector.
The draft rules are based on a negative list approach, detailing 12 areas that online P2P lending platforms are not allowed to engage in, according to a statement released by the Legislative Affairs Office of the State Council, China's cabinet.
The draft rules will have an 18-month transition period, during which the online P2P lending market will be cleaned up and pushed toward operating in a more sustainable way, the statement said. Finalized rules will be released after that based on suggestions and feedback, it also said.
The draft rules define online P2P lending platforms as information providers and prohibit them from receiving deposits, establishing capital pools and also from offering lenders any form of guarantee.
In addition, online P2P lending platforms are not allowed to issue loans or sell financial products such as bonds or trust funds, according to the draft rules, and the platforms cannot mix or bind their services with financial products offered by other institutions.
The platforms will also be required to comply with information disclosure regulations, as well as being prohibited from fabricating or exaggerating information about their fundraising programs or hiding flaws and risks from borrowers.
"The draft rules are very detailed and cover all aspects of the online P2P lending business," said Zhang Weiwei, CEO of Beijing-based online financial information provider zrcaifu.com.
Zhang told the Global Times on Monday that the draft rules reflect the current situation of the online lending sector, which is growing quickly but faces certain problems.
P2P lending has become popular in China in the last few years, partly because small businesses and individuals who are unable to get bank loans have turned to the new platforms as a way to raise funds, analysts said.
As of November 30, there were 2,612 online platforms operating in the country, which have helped borrowers raise funds totaling more than 400 billion yuan ($61.68 billion), according to the statement from the Legislative Affairs Office of the State Council.
However, due to the lack of regulations for the sector so far and vague boundaries for participants, there have been some issues and hidden risks, the statement said, adding that about 30 percent of the online platforms are "problematic."
There have been reports about cases of fraud in the online lending business, with some platforms suddenly going off-line after taking deposits and some platform operators absconding with people's money.
On average, there were 92 new platforms at risk of failing every month in the second half of 2014, up from an average of 9.3 in the first half, US-based news website businessinsider.com reported in August, citing a report from Morgan Stanley.
With the new rules, risks will be minimized and online P2P lending will start to become a more orderly and healthy industry, said Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology.
However, to really help the online P2P lending business to thrive, lenders and borrowers will have to play a role as well, Dong told the Global Times on Monday.
He said the participants must recognize and manage the risks in their own activities online.
Dong said the online P2P lending industry will continue to grow but at a slower pace, because with the reforms and plans for further opening up the "conventional financial market," it will become easier for companies to raise money through the standard channels.
The online P2P lending industry is still relatively small in scale, compared to the overall financial market in the country, but it is a necessary industry to supplement traditional fundraising channels, Dong noted.