Can credit ratings predict defaults in peer-to-peer online lending? Evidence from a Chinese platform

By investigating a Chinese peer-to-peer online lending platform, Renrendai, we find that the credit ratings of new borrowers do not accurately predict their default. Moreover, we find that on this platform the probability of default by new borrowers is 56%. These findings indicate that in China, in the absence of authoritative credit agencies, platforms' assigning credit ratings themselves, not only induces high investment risk for lenders, but also high systemic risk for platforms since most of these platforms guarantee the loan principal. Our results might explain why over 86% of Chinese lending platforms experience operational difficulties.

Automated summary

This study on a Chinese peer-to-peer online lending platform suggests that credit ratings of new borrowers are not reliable indicators of default, with a default rate as high as 56%. This situation not only increases investment risk for lenders but also raises systemic risk for platforms, explaining the operational difficulties faced by over 86% of Chinese lending platforms.