Financing the Underfinanced: Online Lending in China


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How Outsiders Are Changing the Business of Lending

In China, the mobile internet becomes the mainstream faster and faster. Without doubt, several years later, the number of users on the mobile internet will continue to increase further. From the view of lenders capital in the online lending industry, the competition for the PC users intensifies seriously. In the future, the mobile channel will be the main access.


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The competition focusing on the mobile channel among the platforms is going to break out sooner or later. In the future, online lending will be on the right track towards development with a solid foundation to gain the confidence and acceptance from the regulators. With the strong demand and supply for loanable funds, online lending can be expected to be more flourished with increasing transaction volumes.

At the same time, the online lending industry will become more and more competitive, and the winners will likely be the fewer survivors that could eventually dominate the industry on their own. Chinese online lending will continue to make for significant progresses.

Read Free For 30 Days. As of August Flag for inappropriate content. Related titles. Carousel Previous Carousel Next. Jump to Page. Search inside document. Table1The Chronicle of the Development of P2P Online Lending in China Shanghai, China Paipaidai was online, opening the first page of online lending in China Shenzhen, China My went online, and created the principal advance payment model Beijing, China Renrendai went online, representative online lending platform using risk reserve provision Shanghai, China Lufax, the first online lending platform backed by bank The number of online lending platform reached more than in China The Year One of Internet Finance in China when online lending Platforms bloomed everywhere and transaction volume exploded out 1 www.

And the total number of loan balance of these three districts accounted for Definitely, 5 www. The central bank 9 www. Swapnil Madgulwar. Emman Bastasa. Who Runs the World? New World Order, Global Elite. Casey Jones. Thanhthuy Nguyen. Jhoven Paul Ventura Tolentino. More From CrowdfundInsider. Speech by Dr. Bitcoin Foundation Letter to Congressman Cleaver 5. Shane Vander Hart. Popular in Science. Javier Bejar. Adib Akmal. Mike Eugene Collins.

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Marko Dabic. Saiteja Reddy. Mathew Sawyer. Gabriel Olumide Olowe. Teodoro Guallpa. The risks associated with unguaranteed bank WMPs are the mismatch of maturity between WMPs, which are of short-term nature, and on-lend to long-term projects. The maturity mismatch exists for each individual WMP separately leading to enhanced rollover risks as several WMPs could mature at the same time.

The lack of transparency in WMPs is another associated risk. As the banks are involved in the issue of WMPs, whether directly or indirectly as an intermediary, they are considered implicitly guaranteed and risk free. This is compounded by the fact that the banks are government owned. As many of these are off-balance sheet activities they pose significant risk to the banking sector. According to peer to peer finance association, cumulative global P2P lending was 4.

Financing the underfinanced : online lending in China /

The number of P2P online platforms in China increased from only 50 in to in Financing through P2P platform has also contributed to a stock market bubble when the loans borrowed by the individual borrowers were invested in the stock market compelling the regulators to ban P2P lending for stock market purchases Canuto and Zhuang Some of the pitfalls of P2P lending in China, similar to other shadow banking products, include the absence of liquidity support from central bank, operating outside the perimeters of the banking system, maturity mismatch, systemic risk and guarantees of high returns similar to WMPs.

P2P lending in India is also emerging gradually. Accurate data on the number of P2P companies is not available for the country, however there are around 30 start-up P2P lending companies, much lower than China RBI These are largely tech companies registered under the Companies Act and they act as an intermediary between the borrower and the lender.

In fact, as discussed earlier, the state owned banks have been a significant participant in the shadow banking system and regulatory arbitrage has been a compelling factor in this role. As Sharma , p. The probable risks attached with shadow banking in China include higher liquidity and solvency risk, for instance, mismatch between raising of funds through short-term wealth management products and investment in long-term projects and speculative real estate Lu et al.

Also, the decline in overseas export demand has the potential to hurt small and medium enterprises and their capacity to repay loans mostly borrowed from shadow banks. Furthermore, the interconnectedness between shadow banks and the banking sector is high and vulnerable to shocks and could lead to disruptions and systemic crisis. Adequate external supervision and regulation is therefore crucial for a stable financial system. Circular has been an important step in the regulation of shadow banking in China.

In a balanced approach, it acknowledges that shadow banking plays a positive role in the economy, supports traditional banking system in providing financial services and has enhanced financial development of the country through innovative financial products. At the same time, it also took into account the potential systemic risks of shadow banking Huang The Circular adopts an entity based approach in sharing the regulatory responsibilities as it assigns shadow banking products to different regulators based on their area of responsibility Huang Local governments also regulate some shadow banking activities.

For instance, it leads to a multiplicity of regulators of the same product leading to regulatory inconsistencies and arbitrage Huang The Circular also fails to deal with the new innovative shadow banking products which may not fall within the perimeter of any regulatory agencies.

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Financing the Underfinanced - Online Lending in China | Jiazhuo G Wang | Springer

This data and information will be shared among the regulators. Shadow banking entities are further required to establish mechanisms for internal control, risk management and risk segregation in accordance with risk bearing capacity. It is also stipulated that financial institutions, especially commercial banks, must separate WMPs business from their other businesses.

Overall, in the recent period many regulatory measures have been adopted by the government to regulate shadow banking in the country.


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Factors leading to Rise of Shadow Banking in China and India9 9 Some studies have also noted differences between factors responsible for the rise of shadow banking between US and China. For instance, Li states that, in contrast to the rise of US shadow banking, which was a consequence of financial liberalisation, Chinese shadow banking system rose as a result of tight regulatory regimes following the global financial crisis.

The structure of shadow banking in China is bank-centric with active participation from the banks, whereas US shadow banking activities exist mainly in the capital market Dang, Wang and Yao This encouraged regulatory arbitrage by the banks circumventing regulation through shadow banking. Hachem and Song also note that the loan to deposit ratio varies by banks and usually tends to be lower for the Big Four banks and this reflects in their large portfolio of wealth management products.

Financial repression thus has been an important factor in the rapid rise of shadow banking in the country. Other characteristics of financial repression also prevailed in China, such as barriers to entry for private sector banks and monopolistic state controlled banks. Another difference with the US shadow banking is the timing of its rapid growth.

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While the US shadow banking system grew prior to the crisis and was a major factor contributing to the financial crisis, in contrast, shadow banking in China grew rapidly after after a tight monetary policy was undertaken by its central bank Huang Another difference was the demand for such financial services by individuals in the US in contrast to most of the demand originating from private businesses in China Gao Overall, low financial development reflected in poorly developed capital markets, lack of investment avenues and ceilings on bank deposit rates contributed to the rise of shadow banking products in the country.

Sheng et al. In contrast to financially repressive policies in China, significant financial sector reforms were carried out in India in which led to interest rate liberalisation, increased competition with the entry of a number of private and foreign banks, introduction of prudential norms, rationalisation of bank branches and reduction in statutory ratios. The ongoing financial liberalisation allowed loosening of restrictions on the major stakeholders such as commercial banks and NBFCs leading to an increase in retail lending, infrastructure finance and rural lending. The volume of infrastructure finance by NBFCs alone increased by Chinese banks, for instance, mainly cater to large firms while small and medium enterprises are often overlooked.

The corporate sector and local governments are also the beneficiaries of a thriving shadow banking system. Some of the reasons for lack of finance to SMEs in China include political factors such as using state sector including state commercial banks and state owned enterprises as a tool of social stability; running state owned enterprises with the objective of preventing mass unemployment; select development agenda of the government in targeting specific industries; limited capacity of bank loan officers to process credit applications of private sector and also fear of job losses should the private businesses default Tsai Lu, Guo, Kao and Fung argue that a major reason behind the rise of shadow banking is structural imbalance in the economy, for instance, the imbalance between large, monopolistic state owned enterprises and an increased number of private sector enterprises.


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Individual characteristics of borrowers also determined access to the formal or informal sector. For instance, those with better education, political connections, credit rating experience and holding businesses for longer lengths were more likely to borrow from formal channels Zhang While capital markets in India are fairly well developed, these are mostly accessed by the large corporates and SMEs, similar to China, face considerable difficulties in accessing finance Allen et al. The rise in shadow banking in the country has been influenced by increased demand for finance by the untapped sectors often overlooked by the mainstream banking especially in the rural areas.

Allen et al. The recent focus of the government and central bank on financial inclusion has also led to sharp increase in NBFC lending.

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Gandhi too noted that the NBFCs play a complementary role to banks and provide access to finance especially to the poor in rural and urban areas. Recently gold lending NBFCs have been playing an important role in providing finance to the underfinanced or excluded population particularly in the rural areas. Over time the lines of operation between banks and NBFCs became increasingly blurred and, more recently, NBFCs emerged as an important alternative source of credit intermediation. Many NBFCs nowadays compete with banks across a range of consumer financing segments, such as small business lending, asset finance and infrastructure finance.

China has been experiencing an annual average growth rate of 9 per cent since the s. A number of studies have mentioned that this high economic growth, in the absence of adequate support from the banking sector, was fuelled by informal finance. Given the extensive regulations on the banking sector, it was the non-bank entities and off-balance sheet activities of banks that met the credit needs of the firms. In contrast to China, a different set of fiscal stimulus measures along with monetary measures was employed by the Indian government during the financial crisis including tax relief and increased expenditure on public projects.

Description:

Public sector banks were the major providers of credit during the financial crisis and shadow banks or NBFCs started playing a major role only in the post-reform period following risk averseness and high NPAs of the banking sector. Slower economic growth of the country in recent years, deleveraging, deterioration in asset quality and increased risk aversion were some of the major factors leading to the fall in bank credit. With the increased risk aversion of the banks, NBFCs have filled this lending space and continue to provide credit to several sectors.

Conclusion Globally shadow banking has increased considerably in the recent years especially in the developed countries such as US, UK and Eurozone countries. Lately in emerging countries it has shown a significant rise. This study examined trends, structure and causes for the rise of shadow banking in India and China.

Financing the Underfinanced: Online Lending in China Financing the Underfinanced: Online Lending in China
Financing the Underfinanced: Online Lending in China Financing the Underfinanced: Online Lending in China
Financing the Underfinanced: Online Lending in China Financing the Underfinanced: Online Lending in China
Financing the Underfinanced: Online Lending in China Financing the Underfinanced: Online Lending in China
Financing the Underfinanced: Online Lending in China Financing the Underfinanced: Online Lending in China
Financing the Underfinanced: Online Lending in China Financing the Underfinanced: Online Lending in China
Financing the Underfinanced: Online Lending in China Financing the Underfinanced: Online Lending in China
Financing the Underfinanced: Online Lending in China Financing the Underfinanced: Online Lending in China

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