2% interest Loans - P2P Lending a new Phenom in China

A TOI Article about online P2P lending in China

By Zhao Ying

Borrowing money from strangers may sound like an odd proposition to some. But China's farmers are taking advantage of online peer-to-peer (P2P) lending to build better futures. Yang Yanxia, 32, mother of two from Dingxi city in northwest China's Gansu province, borrowed 3,500 yuan ($543) via Yinongdai.com, a P2P lending website, at the end of 2009 to help build her farming business. Dingxi is one of the nation's most impoverished regions, owing to low agricultural yields caused by chronic drought.

Yang's lenders were from first- and second-tier cities in China, who charged her a fixed interest rate of around 2% - much lower than the rates typically charged by Chinese banks. Before 2009, Yang's family earned only $1,553 annually from their potato farm, and even that was subject to the whims of Mother Nature. With the loan, Yang and her husband were able to rent a plot of fertile land that effectively doubled the size of cultivable land available to them. The family's new farms brought in $5,434 in just six months.

Yang then used the profits to construct a barn to raise cattle, which she believes will provide a more reliable source of income. The world's first P2P lending service was launched in the United Kingdom in 2005 and has since become popular worldwide. Most of China's state-owned commercial banks are unlikely to lend to people like Yang, either because the loans sought are too small or because they have nothing to offer as collateral. China's P2P lending platforms give people like Yang an alternative.

Prospective borrowers must provide identification as well as proof of personal assets for a credit rating from the P2P platforms. Lenders can pick who they want to lend to based on the borrower's objectives, the terms of repayment and the interest rates offered by borrowers. Since Yang was unfamiliar with computers, she contacted a local micro-credit service centre for the online procedure. "We submitted her information to the P2P website after examining her credit and family situation carefully," says Yang Farong, director of the Minfuxinrong Micro-credit Service Center. The centre has been helping the people of Dingxi acquire loans for the past five years.

Since 2009, when Yinongdai.com started offering P2P services, 217 farming households in Dingxi have benefited to the tune of $119,544 in low-interest loans, Yang Farong says. Yang Yanxia only had to pay an extra $10.50 to the local micro-credit service centre, in addition to her $543 principal. "I never expected to borrow money from strangers. It's so exciting to know that personal credit still has value," she says. Canadian-Chinese Robert Li, 15, who studies at the Shanghai American School, became a P2P lender two years ago. "The amount of money spent on a single meal in the city can be enough to change the life of a family," says Li, who has lent $4,416 in loans so far with the help of his family.


Li believes that direct online lending is more transparent than charitable donations, and allows lenders greater discretion in providing loans. "Families with school-age children, particularly girls, are our primary targets," Li's mother Vivian says. The fact that there have been no delays in the repayment of loans offered through Yinongdai.com has also impressed her. "This proves that disadvantaged people can still have credit," she says. So far, Yinongdai.com has disbursed $434,705 in loans to nearly 1,000 rural families across China.

As a new form of micro-financing, P2P lending "not only fills in gaps left by the banking system, but also offers convenience to rural borrowers," says Bai Chengyu, secretary-general of China Association of Microfinance. However, P2P services that are designed to help people in need won't always be able to count on a steady supply of funds, as investors invariably seek higher profits amid inflation risks, Bai says.

Can such a venture work in India. The first problem is Collection. Second who will lend money at 2% when our FD rates are hovering around 8-10%.Moreover this is online ,the legal tender of such a transaction is always difficult. Rather than a P2P which is unorganised network i would prefer that reputed banks like ICICI,HDFC can provide this banking service by using their banking facilities to connect borrowers and micro lenders like salaried employees.They can even show the credit history of the borrower and rate them and divide them into categories and if they have good history of repayment then they can have lower interest rates like 2%.and other categories can have slightly higher interest rates like 4-6% but never above 6%. But we have to understand that the lender is basically giving up on savings as he is lending money at lower interest rates to complete strangers. We are dealing with honesty and credibility here which is very difficult to rely on these days.