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.

Wu Xiaoling, dean of the PBC School of Finance at Tsinghua University, put that concern bluntly: "Many P2P firms have become indirect financing vehicles for large projects. Very few platforms stick to the principle of serving small businesses only."

P2P firms, meantime, have their own concerns. It is increasingly difficult, they said, to be a "pure information intermediary" to attract investors, especially given that firms created by established banks or insurers offer much stronger assurances.

Harsh competition has already driven out some players. The CBRC said the heads of at least 150 firms this year have vanished.

But Shi insisted that although consolidation might be inevitable, P2P firms can survive by finding a niche market.

Zhengedai, a new loan product-searching website, serves as an example. Lenders can compare prices and identify suitable products from thousands of loan products by answering an online questionnaire.

An Xiaoyu, founder of the venture, said banks' shortfalls are what prompted him to set up the business.

A former loan officer at a major commercial bank, An found that a large number of people did not know where to get a loan, even though they were qualified applicants.