Influencing Factors on the Willingness of Lending in online P2p Market in China

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Figure 1.2 The Number of Bankrupt Online P2P Platforms in China[pic 2]

These problematic platforms include the platforms’ owner run away with money, business close down, withdrawal difficult and economic intervention. Compared with 2014, the proportion of platforms’ owner ran away with money and business closed down increased in 2015, and declining in proportion of platforms’ withdrawal difficult and economic intervention compared with 2014 (WDZJ.com, 2016). This is due to the increasing number of platforms increased the pressure of survival for small and medium sized online lending companies, and also due to the continuous improvement of regulatory mechanism forced to online P2P lending platforms in China, thus, more and more platforms are more likely to run away with money once they got huge bad debts. Meanwhile, the reason of withdrawal difficult in P2P lending platforms is because of “bank run phenomenon”, the situation is, the lenders ask to withdraw all of its money from the platforms when they have trust crisis on platform, so companies overwhelmed and collapse. Detection of economic is rarely happened in China’s platforms, this will occur when platform is suspected of illegal absorbing public deposit, so the economic crime detecting policy will get involved and investigate. The following pie chart shows the percentage term of each event of problematic P2P lending platforms in China.

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Figure 1.3 Types of Events of Problematic Online P2P Lending Platforms in China

Furthermore, in the current situation of China, Chinese P2P lending market lacks of relevant laws to impose restriction to the platforms and industrial supervision (Wang & Liao, 2014). Due to the imperfection of legal system of P2P lending behavior in China, there still has the absent of constraints on borrower’s behavior and punishment on failure to make repayment of loan, so it leaves loopholes to some people who believe they only need to pay small cost for their nonperformance. Therefore, lack of relevant laws take charge of borrowers and platforms led to the lack of trust from lenders to borrowers and platforms.

Additionally, credit risk is also closely related to lenders’ trust to borrower and platforms, because most of the platforms in China are lacks of perfect personal credit evaluation system. Meanwhile, some lenders prefer to take higher risks for greater return (Zhou & Pham, 2004), so, this kind of lenders have potential high risk and encourage low credit borrowers step into the P2P lending industry. Furthermore, most of lenders are short of individual financial expertise and experience to judge borrower’s credit risk (Iyer, Khwaja, Luttmer, & Shue, 2009) and are overconfidence on their investment decision (Li H. , 2014). It leads them make the wrong decision and exposure high risk. Credit transaction requires lenders to make accurate credit level judgment for borrowers, but the judgment can’t never go wrong. This is due to the transaction participants who have different information level, some participants can get some information that others may never touched, this result to information asymmetry. Thus, lots of borrowers utilized information asymmetry to obtain the loan only once and then leave the P2P lending platforms (Collier & Hampshire, 2010). Therefore, borrower’s credit risk result to lender’s trust problem to the borrowers, and question about platform quality.

Overseas’ platforms such as Prosper and Zopa which have various methods to evaluate the borrower’s credit, and even have cooperation with the third party. But there is no such agency in China (Chen & Han, 2010). At same times, the current credit risk management technology of P2P lending in China is relatively backward. A majority of platforms just simply imitate traditional credit risk assessment model. But, in China, the bank can require very detailed personal information because it is legal regulation. But online lending platforms don’t have this right, so it is also the reason that result to the information asymmetry between borrowers and lender, also for borrowers and platforms. The following table is summarize the differences requirement of borrow money between traditional bank lending and P2P lending:

Major Aspects

Traditional Loan Financing

P2P Lending

Collateral requirement

Yes

No

Basic personal information

Yes

Yes

Loan amount

High

Low

Loan period

Long

Short

Interest rate

Low-Medium

Medium-High

Legal restriction

Strict

Loose

Legal protection

Yes

No

Risk

Low

High

Transaction cost

Low

High

Table .1.1: Comparison between the traditional bank lending and P2P lending

The researches of abroad P2P lending industry are mainly focused on three aspects, first is the influencing factors of lending behavior (Klafft, 2008), second is borrower’s behavior in P2P lending platforms (Berkovich, 2011), and the last one is the regulation of P2P lending platforms (DAVIS & GELPERN, 2010). However, all of these researches are based on capitalist market in Europe and America, and very few researches pay attention to the emerging market. Furthermore, due to the lack of personal credit rating system in China’s P2P lending platforms, result to the establishment of the personal credit rating system entirely depends on the P2P lending platform’s own credit rating system. Therefore, due to the special situation of China’s