Central bank to include troubled P2P lending industry in credit system

By Nicole Jao
2 min read
The People’s Bank of China headquarters in Beijing. (Image credit: Wikimedia Commons/Yongxinge)

China’s central bank will include the country’s troubled online peer-to-peer (P2P) lending platforms in its credit reference system as the clampdown on illegal financial services continues, Chinese state-run media reported on Wednesday.

Why it matters: Connecting lending platforms to credit reference databases means even greater oversight over P2P platform operators, borrowers, and lenders. The P2P lending industry, plagued by bad practices and fraudulent activities which flourished under lax regulations for years, has been heavily pruned by government-led clean-up efforts.

  • The country’s household debt has been expanding rapidly since 2008 and is a growing national concern in recent years. Establishing a disciplinary measure that raises borrower costs for defaulting would help with problems such as over-indebtedness and high default rates.

Details: The official guideline (in Chinese) released on Monday by the country’s internet financial risk and online lending regulators requires P2P lending companies to register with the credit agency database which includes operators of basic financial credit information databases and Baihang Credit, China’s first privately funded personal credit platform.

  • All lending records from online P2P lenders are required, not just information on loan defaulters.
  • Operating P2P lending platforms will need to provide specifics such as online lending interest rates. Credit information will still be collected for platforms out of business.
  • Regulators also encourage financial institutions and insurance companies to increase disciplinary action against defaulters. Those in default on lending platforms may face higher loan interest rates and limits on loan and insurance services, according to the guideline.

Briefing: More than 600 entities now connected to Baihang credit database

Context: China has tightened its regulation of the online lending market in recent years to lower financial risk. The P2P lending industry is in regulator crosshairs and has shrunk significantly in market size and transaction volume. About 700 platforms remained in operation in August, halving in number from the same time last year.

  • The government recently released a three-year development plan for its rapidly growing fintech sector, which hinted at heightened efforts to come in cracking down on risky and illegal lending.
  • The country has been trying to expand the coverage of its credit scoring system to gain better control over household debt and default rates. Institutions like Baihang Credit aim to shed light on blind spots in the existing centralized credit reference system. Baihang provides credit reporting services and data on fees from internet financial services and online lenders to the central bank to improve the accuracy of the credit scoring system.
  • Such credit scoring systems have raised concerns over data privacy and the state’s increasing power to monitor individuals and business activities.