Financing the Underfinanced by Jiazhuo G. Wang Hongwei Xu & Jun Ma

Author:Jiazhuo G. Wang, Hongwei Xu & Jun Ma
Language: eng
Format: epub
Publisher: Springer Berlin Heidelberg, Berlin, Heidelberg

3.1.3 Risk Sinking Fund Provision Model

Advance payment model requests relatively higher level of fund reserve on P2P online lending platforms. However, the registered capital of current online lending platforms is typically far less than the transaction volume with leverage. In addition, the advance payment model may seemingly appear to be a nice choice for online lending, but in fact, the guaranty company will take away a part of profits from the online lending platforms. Therefore, the question is whether there is another possible choice that can provide similar guarantee functionality but, at the same time, can save capital of the platforms from advance payment or avoid profit sharing with third-party guaranty company. The answer is yes, and the solution is risk sinking fund.

Risk sinking fund or risk reserve provision (also known as the risk warranty fund ) refers to a capital account that is set up by online lending platforms. When default occurs, the platforms can pay back to the lenders using the fund in this account. The sources of the reserved fund are not restricted to the capital from P2P online lending platforms; the loan management fee, recovered debt payment, and interest-sharing with lenders are also included.

Obviously, the advantage of the risk reserve provision model is that platforms no longer bear the repayment liability in the case of default, so their bankruptcy risk is significantly reduced. However, the disadvantage is also obvious. When the large-scaled default occurs, lenders would still suffer loss of their invested capital, as the capital in the pool may not be adequate to cover all the default loans.

Renrendai, located in Beijing, is a representative online lending platform using risk reserve provision.9 Renrendai is one of the largest (in scale) and one of the most famous online lending platforms in China now. Its transaction volume has exceeded RMB 2 billion Yuan since its inception. The risk reserve account of Renrendai is a separate, special purpose account. Renrendai charges certain percentage of service fees for every single transaction through the platform, and deposits the fees into the risk reserve fund account. When bad debt occurs, Renrendai will automatically advance the payment to lenders using the fund from risk reserve. In fact, risk reserve provision forms a risk-sharing mechanism among all online lending participants. The Shanghai Branch of China Merchants Bank was retained as an independent trust to manage the risk reserve account and issue monthly report on its fund flows.

According to the Annual Report of Renrendai in 2013, its total overdue loan in the fourth quarter of the year reached nearly 14.31 million Yuan, and the overdue rate was 0.64 %. Its risk reserve fund balance reached 24.53 million Yuan. The ratio between the reserve balance and principals to be repaid back was 1.94 %, much higher than 0.64 % of the default rate.

In general, if the loan repayment is overdue for more than 30 days, the risk reserve fund will start to advance full payment to lenders, and the platform will urge borrowers for repayment. If

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