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| Risk of Online Lending Marketplace: Macro Factors and Regulation |
| JIANG Jiajun, GAO Ming, LU Ruichang
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| School of Economics, Fudan University; State Grid Corporation of China;Guanghua School of Management, Peking University |
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Abstract Online peer-to-peer lending in China has rapidly developed in recent years. The emergence of the online lending marketplace should in theory meet the financing needs of individuals and small and micro enterprises and has created a new type of risky asset. This newly developed financial market is complementary to the traditional financial system and contributes to inclusive finance. However, in practice, inadequate regulation means that many platforms have experienced defaults and failures. These industry anomalies have led to the necessity of such an online lending market being questioned. Thus, we address two important questions: 1) whether the rapid development of the online lending market is economically reasonable; and 2) if the introduction of regulatory measures can promote the healthy development of the industry.
The emergence of online lending reflects both the development of Internet technology and the demands of consumers for microloan services. Rapid growth in the online lending market is therefore reasonable if these macro factors have an effect, but excessive development will lead to greater default risks for high-growth platforms. We use daily transaction data from 651 nationwide online lending platforms in our empirical analysis.
First, we find that the higher the growth rate of the platform, the lower the future risk of default or shutdown. Second, we further examine the factors influencing the growth of online lending platforms. We find that technology supply and inclusive finance demand have a significant impact on growth. Using the Internet penetration rate as a measure of technology supply, we find that the growth rate is higher in provinces with greater Internet penetration. Technological progress has lowered the barriers to entry in the online lending industry, thereby intensifying competition. Platforms in provinces with more dispersed transaction volume exhibit a faster growth rate. Using the number of microfinance institutions per capita to measure financial accessibility, we find that poorer access to finance leads to higher online lending growth, and that if the platform offers more short-term and small loans, its growth rate will be higher.
We divide the growth rate into expected growth and abnormal growth, based on the above influencing factors. The results show that when the actual growth rate is lower than the expected value, the risk of the platform going out of business will increase. These findings imply that platforms depend on continually high growth. Once growth slows, the risk of failure will increase.
On December 28, 2015, the China Banking Regulatory Commission and several government ministries jointly drafted the “Interim Measures for the Management of Online Lending Information Intermediaries (Draft for Comment).” We regard this as an external institutional shock and find that the risk of platform failure and growth rate are reduced after the release of the regulatory policy, after controlling for changes in technology supply, inclusive financial demand, and other variables. The regulation also alleviates the need for the platform to depend on continuing high growth. Further, we divide the provinces into high- and low-risk, according to the platform shutdown rate before the release of the regulation, to examine the heterogeneous effects of regulatory policies. The results show that the effect of regulation in high-risk provinces is weaker or not significantly different from that in low-risk provinces, indicating that the regulations should be strengthened.
Our study makes three main contributions to the literature. First, few studies have analyzed the impact of macro-institutional background on the development and risks of the digital economy industry. This study explores the macro factors driving the development of the online lending market. Second, regulatory measures have struggled to keep pace with the rapid growth of the online lending market, while the effectiveness of these regulations have not been fully assessed. In this study we examine the heterogeneous effects of regulation, and thus provide a useful reference to industry participants and regulatory authorities. Third, the empirical designs of most studies focusing on the development of the digital economy involve qualitative analysis methods or only use aggregated data. We extend the literature by using numerous daily transaction data samples from online loan platforms.
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Received: 25 March 2019
Published: 02 July 2020
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