Chinese peer-to-peer lender Renrendai expects to emerge in a stronger position from an industry crackdown that could see hundreds more of its competitors close shop under pressure from regulators.
The Beijing-based company, an online platform that matches lenders and borrowers, believes its focus on supplying credit to the owners of China’s 70m small businesses will see it through a slowing economy and provide insulationin an increasingly tough regulatory environment.
More than 2,000 lending platforms have gone under since the industrypeaked in 2015, with just over 1,000 still operating, according to Wangdai Zhijia, an industry tracker.
As few as 200 firms may eventually be left standing, said Jackson Cheung, co-founder and chief executive of Youxin Financial, Renrendai's parent.
“This isn't bad news — the shakeout in the P2P sector will drive more customers to top companies like Renrendai,” said Mr Cheung, who is also known as Zhang Shishi.
Founded in Beijing in 2010 by Mr Cheung, along with Li Xinhe and Yang Yifu,Renrendai is China's fifth biggest P2P lender. According to research firm 01Caijing, the company has a 5 per cent share of an Rmb800bn ($117bn) P2P loan market.
Renrendai is a likely survivor of an industry undergoing wrenching change. Years of untrammeled growth have ended in fraud, failure and protest. A government crackdown on risky lending practices has resulted in the abrupt closure of hundreds of P2P platforms, wiping out investors.
The behaviour of less scrupulous platforms has generated controversy and headlines, but older, established firms such as Renrendai have also been caught up. The value of the loans transacted by Renrendai fell 32 per cent year on year in the third quarter to Rmb6.5bn, the result, Mr Cheung said, of regulatory pressure to limit its borrowing activities. Industry-wide, the volume of outstanding loans has continued to shrink, falling to Rmb789bn inDecember from Rmb1.2tn at the start of 2018.
Serving small business
Renrendai expects to withstand government efforts to shrink the P2Pindustry because of its exclusive focus on the owners of China’s small and micro-sized firms — a business model that is aligned with official policy.
Despite efforts by the authorities to boost lending to such firms, traditional banks are wary because of their short track records and the greater perceived rewards that come with serving larger, government-connected firms. Mr Cheung estimates that less than 20 per cent of the loan demand of small businesses, defined as making less than Rmb500,000 a year in sales, is being met.As the economy slows and banks become even more reluctant to lend to small businesses, Renrendai expects to benefit, said Mr Cheung.
“Although the demand for loans has been dragged down by the economy, we still see strong momentum in this sector,” he said. “Financing micro-sized enterprises is also welcomed by the government.”
The availability of P2P loans helps borrowers such as Li Boqiu, a 34-year-old Chongqing-based photographer. He waited less than a day for approval for an Rmb100,000 loan from Renrendai to buy equipment for his studio. Although a bank would have charged half of the annualised 24 per cent interest rate, Mr Li would also have had to wait as long as 10 days, with no guarantee of success. (Renrendai is still cheaper than borrowing from a private lending network, which could have cost up to 120 per cent.)
“I urgently needed to buy the equipment and approval from a bank would be too slow,” he said.
The average size of a Renrendai loan is Rmb79,200, lent out for no more than three years. Mr Cheung estimated 90 per cent of China’s small businesses fail within three years, but is nonetheless confident that aRenrendai borrower can make monthly payments of Rmb2,000 or Rmb3,000.
“The business may go bankrupt, but the owner will start a new business or will find a job,” he said.
Unsurprisingly, Renrendai has no plans to go public in the current climate. Worries about the future of the P2P lending industry drove the share price of New York-listed Yirendai, China’s third biggest P2P lender, down 76 per cent last year. Renrendai parent Youxin raised $130m in a 2014 funding round led by Trustbridge Partners, a Chinese venture capital firm.
Regulation will only get tighter. The China Banking and Insurance Regulatory Commission requires all P2P platforms to complete an onerous licensing process by the end of June this year. P2P platforms have already been told to limit transactions, rein in fundraising activities and, more recently, have been subject to greater transparency requirements covering transactions and shareholder and capital structures.
Mr Cheung expects even tighter regulation, concentrating on greater information disclosure, data monitoring and an expanded custodian role for banks handling P2P transactions.
Yao Zeyu, an analyst with China International Capital Corp, a domestic investment bank, said the industry was still underestimating the government’s regulatory intent. He forecasts much tougher restrictions, including the imposition of capital adequacy ratios. Lending platforms also face growing competition from banks and non-traditional lenders, including the credit services of Ant Financial, the fintech arm of internet giant Alibaba, he said.
As a result, Youxin is developing its business outside the traditional online P2P lending model. Renrendai’s parent has partnered with Xinwang Bank, a Sichuan-based internet bank, to expand financial services offerings.
“The future for these P2P firms lies in co-operating with traditional banks to get cheaper capital and help with risk management,” said Yu Baicheng, research director at 01Caijing.
The company also maintains Ucredit, an offline consumer and small business loan operation, helping hedge against the P2P industry’s travails.
It was at a Ucredit outlet that Mr Li, the photographer, underwent a face-to-face interview before his Renrendai loan was granted.
— Wang Suya, director of Network Research, FT Confidential Research scoutAsia is a corporate data and news service from Nikkei and the FT, providing in-depth information about more than 660,000 companies across more than 20 countries in East Asia, South Asia and Asean. This exclusive scoutAsia Research content has been produced by FT Confidential Research.