China’s former largest P2P platform Hongling Capital announced in late July that it would quit the online lending business within three years. During the period, Hongling will try to find ways to handle toxic loans, by selling collateral properties, for example.
The platform now has over 20 billion yuan ($3 billion) assets to settle, which includes 5 billion yuan ($750 million) of non-performing assets and 800 million yuan ($120 million) of bad debts. As of August 12, Hongling Capital has had 1.85 million investors and the accumulated trade volume is 274.7 billion yuan ($41 billion).
Large Loans Model
Hongling’s announcement put an end to what’s in China called “large loans model”.
The idea of the “large loans model” is that P2P platforms would match retail investors’ money to large projects that need to be financed, and sometimes a single loan from a single project could be as large as 100 million yuan ($15 million). Some of these projects were subprime and could hardly get loans through traditional financing approaches.
Established in 2009, Hongling as one of the oldest P2P platforms in China and they have created many innovative practices in P2P lending. However, some of these practices were later banned by the new regulatory rules. The large loans model was one of them.
Before the P2P lending industry took off in China, there were few explicit regulatory rules. However in August 2016, regulators released new rules on the loosely regulated industry, capping the size of loans at 1 million yuan ($149,000) for individuals and 5 million yuan ($743,000) for companies.
This basically ended the large loans model for companies like Hongling. Zhou Shiping, the founder and chairman of Hongling Capital, said on various occasions that he is not optimistic about P2P lenders that solely providing small loans. The reasons are two-fold. First, the interest rate would be too high for retail borrowers, and second most P2P lenders are not capable of using technologies, like anti fraud, to maintain their business.
For now, some relatively successful P2P lenders introduce PE/VCs to invest in the bad loans, and then PE/VCs will exit through capital markets, Zhou said.
Although Hongling is one of the largest P2P platforms measured by trade volume, it has barely made a profit and even began to make loss recently: Hongling Capital made a loss of 183 million yuan ($27.4 million) in 2016 whilst in 2015 their business was still in the black.
This is largely because Hongling has a tradition of guaranteeing principal and interest on loans it facilitates – this is another common practice in the P2P lending industry in China that was initiated by Hongling and later banned by the new regulations.
It is interesting to see that, at the press conference where Hongling announced it would quit the online lending business, some investors still wanted to make investments on whatever platforms run by Zhou Shiping.
Zhou Shiping, born in 1968, always shows up in the public with a humble and down-to-earth image. Zhou has been transparent about some of the bad debts on the platform. After breaking the bad news, Zhou usually implicitly or explicitly guaranteed that the investors would not lose money, as the platform would pay up.
A regulatory policy released in December 2015 forbids P2P lenders from guaranteeing returns to investors. In April 2016, Zhou finally said Hongling would stop doing that.
As I see it, the practice of guaranteeing principal or interest could be problematic in at least three ways:
- Platforms will have increasingly more investors who have little risk awareness, which likely results in a situation where “bad” investors drives out good;
- If one P2P lender guarantied a bailout, chances are that many others would follow; otherwise investors would just go for the seemingly safer platforms that guarantee the principal and interest. Hence the vicious competition between P2P lenders;
- With fewer and fewer sophisticated participants, the issuers’ disclosure on the loans would be nothing more than a formality, which is harmful for the industry in the long run.
What’s The Next For Hongling?
In the next five years, Hongling Capital will be gradually merged into Hongling Holding (established in January 2017).
The major business of Hongling Holding will be investment-banking business. Apart from providing financial advisory services around M&A transactions, Hongling Holding will have other business lines such as asset transactions and wealth management.
The projection is that Hongling Capital will provide resources for Hongling Holding’s wealth management business. The later is now applying for relevant licenses. Zhou Shiping expects Hongling Holding to make a profit in 2018.
Now Hongling Holding has less than 100 employees. Hongling Capital will provide training to its current employees (almost 1000 people), and some of them will get into the holding company, Zhou said.
Now the story has played out like this. Hongling Capital, once the phenomenal pioneer of the industry, will gradually fade from China’s P2P lending stage.