China's P2P trading booms in 2014, while risks emerging

First, unlike many other firms, Hexindai provides only asset-backed borrowing, with homes making up the bulk of the collateral. Shi Han, the company's general manager, said most of the borrowers are businesspeople with short-term financing needs. If they fail to fully repay their loans, their assets can be sold for repayment.

Shi, who previously worked for a large, collateral-free P2P, said: "Many P2P firms now offer loans without a collateral requirement. Although they have their own credit assessment methods, I feel that Chinese people still trust our model more."

The company also signed cooperation deals with third parties to accredit its electronic lending contracts and facilitate online payment.

Investors are mainly lured by high returns. In Hexindai's case, the annualized return is between 17 to 18 percent, compared with the 3.25 percent one-year fixed deposit interest offered by banks. Even that double-digit return is in the middle of the pack - many of Hexindai's peers offer a 25-30 percent annualized return.

So why do borrowers choose his company? The answer, he said, is simple: They get paid quickly.

Borrowers can get money in one or two days, whereas similar applications could take at least two months to be approved at banks.

"Many borrowers have an urgent financing demand. For them, the higher cost is OK. Unlike many peers, borrowers are allowed to repay only monthly interest before they pay off the principle. It is attractive to many businessmen," Shi said.

To cover the possibility of bad loans, the company sets aside 1 percent of the outstanding debt to cover soured loans. The ratio seems low, but Shi said that, given the fact that among over 100,000 online borrowings so far, none has gone sour (only four offline borrowings became nonperforming), the ratio is reasonable.

There are other ways to protect investors. Yooli, also a major P2P website, connects investors with small-loan companies' clients. The companies can offer guarantees for their recommended clients. In return, they circumvent regulators' stringent leverage requirements.

The model, now a mainstream practice among China's P2P firms, had its regulatory risk.

One of the four general principles laid out by the CBRC in April is that P2P websites can only serve as a "pure information intermediary" and cannot offer a guarantee for loans.

Other principles include a ban on P2P platforms to cultivate capital pools, as the regulator fears the scope would expand beyond individual and small business borrowings.

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