Despite many advantages, peer-to-peer lending (P2P lending) is also hiding many risks for the economy and society. Therefore, the development of appropriate legal corridors is necessary to govern this type of business.
According to statistics released by the centre for Economic Research of Maritime Joint Stock Commercial Bank (Maritime Bank), Vietnam currently has 40 active P2P lending companies, of which ten are originated from China, some companies from Indonesia and Singapore. The State Bank of Vietnam (SBV) said that some of these 40 companies have disguised activities, violating the laws on banking and credit. Recently, the SBV has advised people to be cautious when participating in this model.
Many benefits but also many risks
P2P lending has developed in many different countries since its first appearance in the UK in 2005. This is a digital technology-based business model that directly connects borrowers and lenders (investors) without financial intermediaries. Accordingly, P2P lending provides a platform for borrowers to connect directly to lenders. P2P companies are entitled to service fees from both investors and borrowers.
Statistics released by the centre for Economic Research of Maritime Bank in a report recently stated that in 2012, total global outstanding loans through P2P channels reached about $1.2 billion, in 2015 $64 billion, and is expected to reach over one trillion US dollar by 2025.
According to the centre for Economic Research of Maritime Bank, the main advantage of P2P lending is considered on three related parties. For borrowers, this model helps them to access capital in case of difficulty in accessing formal capital, fees and interest rates in this model may be lower in comparison to ordinary comsumer loans. For investors, this model provides an investment channel that contributes to diversifying investment portfolios, and an attractive revenue sources (interest rates are often higher than those of savings and regular bonds). As for P2P lending companies, this is a new field where they can utilise their existing technology base, bring in revenue and diversify activities.
Speaking of benefits, the SBV also said that, if well managed, P2P lending would contribute to promoting comprehensive finance, especially in areas where the financial system is undeveloped, financial and banking services at low cost and simple procedures are less accessible to individuals, business households, small and medium enterprises.
Even so, both the SBV and experts agreed that this type of lending is risky. The main cause of the risks pointed out by the parties is due to the lack of legal corridors, so when there is a risk, the parties concerned are not responsible or cannot settle the compensation as usual.
In addition, moral hazard occurs when borrower fails to repay the debt, and P2P company uses money for improper investment, has poor management or goes bankruptcy, leading to the possibility of losing investors’ money. Seriously, P2P lending may appear in distorted forms, such as fraudulent P2P companies, high interest rates and fees despite the borrower’s ability to repay, and borrowers do not repay their debt.
P2P lending will be strictly managed
Through the study, experts from the centre for Economic Research of Maritime Bank said that in countries around the world, management regulations for P2P lending activities focused on three main issues, including: regulation on investment/lending limits of investors; regulations on licensing, operation and supervision standards for organisations providing technology platforms; regulations and monitoring activities of information disclosure.
Besides, all countries consider this activity to be a conditional business and a competent authority must license it. However, from different views, each country assigns P2P management to different agencies such as the Central Bank, the Financial Management Agency, the Securities Commission, and the Financial Services Commission.
What about Vietnam? In order to promote the strengths of P2P lending and reduce risks, deputy prime minister Vuong Dinh Hue presided over a meeting with a number of relevant ministries and agencies to listen to the SBV’s report on P2P lending activities in Vietnam. At the meeting, deputy Governor of the SBV Nguyen Kim Anh asked the government to issue a resolution to allow the policy to be implemented and the prime minister to issue a decision to allow pilot implementation to finalise the legal management framework.
In the short term, P2P lending should be managed within connecting individual borrowers and individual lenders as most companies in Vietnam are currently doing, not yet opening to the participation of financial organisations. In addition, P2P lending companies should not be entitled to raise funds to lend.
Immediately after the meeting, the government assigned the SBV to build a legal framework for credit activities in the form of P2P lending to promote the positive aspects of the product, and prevent and reduce risks and negatively impacts on participants, ensuring safety for individuals and businesses.
Until now, the SBV has been coordinating with relevant ministries and agencies to study and prepare for proposal of appropriate management measures for new forms of payment based on technology in general and P2P lending operations in particular in Vietnam.
