BEIJING (Reuters) - China's banking regulator unveiled aggressive measures to restrain the country's fast expanding peer-to-peer (P2P) lending sector on Wednesday, warning that almost half of the 4,000-odd online lending platforms are "problematic".
The $93 billion P2P lending sector has been a source of funds for individuals and small businesses overlooked by the country's traditional financial services institutions that prefer big borrowers with better credit history and collateral.
But Beijing's hands-off approach to promote the sector as a form of financial innovation has led to a rash of high-profile P2P failures, scandals and frauds.
Some P2P firms are running Ponzi schemes and raising funds illegally, said the China Banking Regulatory Commission (CBRC), which jointly released a new set of regulations with three other government bodies to tame the unruly sector.
Under the new rules, P2P firms cannot sell wealth management products nor issue asset-backed securities, and must use third-party banks as custodians of investor funds. P2P platforms will also not be able to take deposits.
The regulations, issued by the CBRC, Ministry of Public Security, Cyberspace Administration of China, and the Ministry of Industry and Information Technology, follow the passage of a plan by the State Council, or cabinet, four months ago to clean up the online finance sector.
The banking regulator also set a ceiling for borrowers to control the size of loans on P2P platforms, said Li Junfeng, director of the Inclusive Finance Department at the CBRC.
An individual can borrow a maximum of 200,000 yuan ($30,072) from a single P2P platform and a maximum of 1 million yuan from all P2P platforms, he said. A company can borrow no more than 1 million yuan from a single P2P platform, and no more than 5 million yuan from all P2P platforms.
The regulations also ban P2P firms from providing guarantees for investment principal or returns, a common marketing practice to lure funds from unsophisticated retail investors.
"Investors must understand they need to bear the risks for their investments, no matter big or small," said Li from the CBRC.
"These are not deposits. So we are telling P2P investors: P2P is risky, investments need to be cautious."
As of end-June, China had 4,127 P2P platforms in operation, of which 1,778 were "problematic", the CBRC said. The remaining firms had total outstanding loans of 621.26 billion yuan ($93.43 billion).
Those troubled P2P firms, suffering from capital constraints and poor management, have seen executives run away with investor money, the CBRC said. Some were Ponzi schemes that solicited funds illegally.
Those bad players will "have to exit" the market as the government moves to clean up the sector, Li told reporters following the news conference, but he did not give a timeframe.
Ezubao, once China's biggest P2P lending platform, folded earlier this year after it turned out to be a Ponzi scheme that solicited 50 billion yuan in less than two years from more than 900,000 retail investors through savvy marketing. Retail investors are still unable to get back their hard-earned money.
"The industry is going through consolidation right now and the regulator is cracking down on Ponzi scheme players," said James Zheng, chief financial officer at Lufax, the No.1 P2P lending platform in China, at a conference in Hong Kong.
"The now 3,000 P2P companies probably will be consolidated into 200-300 by this time next year. That's okay because they're cracking down on all the bad guys," Zheng said.
"What doesn't kill will make you stronger, that's the case for us."
($1 = 6.6506 Chinese yuan)
(Reporting by Shu Zhang and Nick Heath; Additional reporting by Cheng Fang in BEIJING and Elzio Barreto in HONG KONG; Additional writing by Ryan Woo; Editing by Kim Coghill and Jacqueline Wong)