Proper rules for P2P lending in demand

P2P lenders may be more attractive in areas with fewer banks, but can charge extraordinary lending rates, Photo: Dung Minh

The People’s Bank of China (PBOC) has issued a notification relating to increasing the legal framework to control this model.

In November, the PBOC decided to close more than 10,000 P2P lending platforms, which began operating in China as much as 14 years ago. These platforms had attracted the attention of millions of private investors.

In addition, PBOC asked leaders of Ant Group, an affiliate of Alibaba, to deal with financial violations in credit, insurance, asset management, and business. PBOC also required the group to ensure private information security during the process of customers receiving a credit rating.

The South China Morning Post reported back in 2017 that China was beginning to see risks in this model, and thus committed to removing it altogether from its financial system. Tighter regulations saw the number of P2P services plunge to 343 in 2019 compared to 2,680 in 2016, with more than half of the platforms now based in Beijing only. Gansu, Hebei, Hunan, Chongqing, and Sichuan were among the provinces that ordered a complete shutdown of P2P lending in 2019.

The abrupt expansion of China’s online lending and its subsequent collapse has showcased the high risks that go hand-in-hand with the Chinese market where the mood in Beijing can change overnight to create or kill an industry.

In addition, the collapse of the model there has raised concerns about a wave of businesses shifting activity to Vietnam, with the country already reporting in increase in presence of dozens of P2P lenders in recent years.

Chinese P2P companies in Vietnam have created unfair competition and caused confusion among customers, with some companies reported to have scammed customers by issuing loans with large lending rates of around 60-70 per cent per month. Experts warned that Chinese platforms in particular may contribute to distorting the domestic P2P lending market and take it closer to a collapse similar to that in China.

The Ministry of Planning and Investment (MPI), through the Central Institute for Economic Management, organised a workshop in Hanoi in last December to collect comments from relevant units on a draft report on impacts of some major sharing economy models before submitting it to the government. The draft report mentioned the P2P lending model, but the MPI has admitted that Vietnam has yet to have a specific legal framework for it.

Although the model can create a positive impact on society and whip up a new capital supply channel in remote areas where the banking sector remains undeveloped, without strict management possible violations will continue to rise, contributing to increases of bad debt risks.

According to the State Bank of Vietnam, the country currently hosts more than 100 P2P lending companies such as Tima, Trust Circle, Vay Muon, Lendmo, Wecash, and InterLoan, with some originating from China, Russia, Singapore, and Indonesia.

In its draft report assessing the impact of the sharing economy on the Vietnamese market, the MPI emphasised the P2P lending model’s impressive growth in size, market share, and number of customers.

“This illustrates the potential of Vietnam’s consumer loan market and that it is a fetile land for P2P lending,” the MPI noted. “Notwithstanding, this model still has many shortcomings.”

In particular, the ministry highlighted that some P2P lending companies act as distribution channels for pawn shops. Some firms, on the other hand, have been known to take advantage of the market’s lack of appropriate regulation for illegal purposes such as money laundering, usury loans, and multi-level marketing loans. Despite attractive advertisements and competitive rates, some of them have been known to charge otherworldly lending rates and threaten violence when borrowers fail to pay on time.

In June last year, Cashwagon was investigated for charging 500-per-cent lending rates annually for a loan of VND2 million ($87). Customers had to pay a total of VND2.88 million ($125) after 30 days. If the customer fails to pay in time, the rate can even go up to 1,000 per cent.

Last year, Cashwagon’s revenue and after-tax profit were reported at VND532 billion ($23.13 million) and VND163 billion ($7.08 million), equalling a gross margin of 31 per cent – an ideal figure for most financial institutions in Vietnam.