CHINA should tighten regulation for online lending “as soon as possible” with stricter internal auditing requirements to prevent failures in a greatly over-leveraged sector, the head of China’s oldest peer-to-peer (P2P) lender said in an interview.

    Non-bank lenders are increasingly able to skirt rules on indebtedness by expanding into the largely unregulated realm of financial technology (fintech), chief executive Cliff Zhang of online financing platform PPDAI told Reuters.

    “All these so called peer-to-peer players need to become real peer-to-peer platforms” through regulation, Zhang said.

    “They need to change their business models.”

    China’s P2P and online finance industry has boomed in recent years. The government has kept a hands-off approach to promote alternative sources of funding for consumers and small businesses, which industry insiders say are often denied credit by banks and other mainstream financial institutions.

    PPDAI, for instance, was founded in 2007 and specializes in small loans to consumers looking to pay for gadgets and travel.

    The firm expects transaction volume to nearly quadruple in 2016 from 5.6 billion yuan (US$850.87 million) last year, Zhang said.

    But scandals including the US$7.6 billion Ponzi scheme uncovered at one-time P2P market leader Ezubao in February have prompted closer scrutiny from the authorities.

    Lenders such as guarantee companies and small loan firms are permitted to lend up to 10 times net assets. But some have launched P2P businesses or marketplace loan platforms where the absence of such a constraint has resulted in leverage ratios that are at 20 or even 30 times, Zhang said.

    “They create a platform, they call it a P2P platform, they find the borrowers offline and they put the borrowers online to attract funds from investors and they also provide the guarantee services to the borrowers to make the investors feel that it’s safe to invest,” he said.

    “Actually their leverage is far more than 10 times already, but they call it Internet finance or fintech, so they’re not regulated by the traditional laws for the offline guarantee companies.”

    Clear rules on what online lenders can and cannot do could help prevent failures and abuses, Zhang said. Lenders should also be required to have internal audit teams to improve risk control and transparency, he said.

    (SD-Agencies)