Is peer-to-peer lending viable?
Regulations to be introduced but questions linger
Peer-to-peer (P2P) lending, which was regarded as an innovative fintech service, is now facing questions over its viability, based on rising delinquencies and the latest cases of fraud.
P2P lending enables loans for individuals and businesses with poor credit by connecting them directly with investors who become lenders, without a financial firm acting as a middle agent.
Since the introduction of P2P lending in Korea in 2015, financial authorities have been eager to promote P2P platforms as part of efforts to foster the fintech industry here.
As part of such efforts, Financial Services Commission Chairman Eun Sung-soo visited the P2P lending platform Popfunding last November, stressing the importance of the financial innovations provided by the platform.
Popfunding has provided movable asset-based financing for e-commerce firms, taking inventory as collateral, and also offered systematic inventory management services. The platform was recognized because in the past inventory as collateral received relatively low attention compared to machinery or intellectual property, due to difficulties in assessment and management.
However, Popfunding has come under scrutiny recently after the Financial Supervisory Service detected irregularities. Redemptions were subsequently suspended for 35.5 billion won worth of private equity funds investing in the platform’s assets, based on delinquencies of borrowers.
Popfunding is now facing prosecution investigations on allegations of fraud, including using new investors’ funds to redeem previous delinquent loans for existing investors. Its CEO has been detained on suspicion of fraud and faces indictment.
According to data from the P2P industry, Popfunding now faces a 96 percent delinquency rate. Its loan balance stands at 129 billion won.
P2P lending platforms that have been considered to be in good shape have also seen their delinquencies rise.
Tera Funding, the top P2P lending platform in terms of cumulative loans, has seen its delinquency rate rise above 20 percent. Its delinquency rate rose to 20.18 percent in June, which is up 7.21 percentage points from 12.97 percent in Dec. 2019.
Tera Funding connects architecture businesses with individual investors. It is subject to greater losses than loans for individuals considering the scale of loans for project financing. Delinquencies have occurred for 15 cases of loans in the form of project financing.
The average P2P lending platforms’ delinquency rates rose to over 16 percent last month, which is up from around 10 percent last year.
Some say the P2P lending model is built to lead to delinquencies and potential defaults, as it provides loans to borrowers with poor credit.
When delinquencies rise, the platforms are likely to resort to paying off investors with funds from new investors, an official in the financial sector said.
“The firms are supposed to disclose their delinquency rate but when the rate rises they will likely stop doing so, as they will not be able to attract new investors,” he said.
“It is likely that the platforms will start paying back lenders with the funds of new investors, which will easily become a vicious cycle that leads to snowballing delinquencies.”
Following the outbreak of cases involving P2P lending platforms, financial authorities stated they will inspect 240 such platforms. Authorities have vowed to weed out poorly performing firms and shut them down.
Meanwhile, regulations governing P2P lending are set to go into effect on Aug. 27, which will require firms with delinquency rates of over 20 percent to report how they will manage risks at the time they register with authorities.
“The regulation is set to go into effect, but the delinquency rate has risen to 16 percent, and light is being shed on investment risks as some firms are engaging in fraud,” FSC Vice Chairman Sohn Byungdoo said.
Expectations are that regulations may help improve the situation, as up until now the P2P platforms have been “governed” by non-binding guidelines. Authorities had exempted fintech entities from regulations in an attempt to foster the industry.
“Before the introduction of the regulation, the FSS could only forward a case to the prosecution when detecting irregularities,” an official of the finance sector said.