Cash loan controversy

By Xie Jun Source:Global Times Published: 2017/10/25 20:13:39

As lending platforms emerge from the woodwork, experts question their profitability and high interest rates


Photo: IC

Cash loans, also known as fast loans, which come without a mortgage or guarantee, are on the rise in China. The cash loan sector was recently brought into the limelight after online lender Qudian got listed on the New York Stock Exchange, arousing huge controversy. Discussions are centering on two core questions: First, is the industry really that profitable? And second, why are some lenders charging super-high interest rates compared to others? The Global Times contacted industry insiders and experts to talk about those concerns.

Chinese people are becoming more and more willing to spend. But if they don't have money, they borrow. This ever-growing phenomenon has recently thrown cash loans, also known as fast loans, right under the public spotlight. 

Han, a 26-year-old white-collar worker in Shanghai, who preferred only to give her surname, borrowed a 6-month loan of 10,000 yuan ($1505.53) from Mayi Jiebei, the online cash loan service provided by e-commerce giant Alibaba's subsidiary Ant Financial, at the end of September.

"It's quite easy. I received the money within five minutes," she said, adding that she had previously registered personal information with Ant Financial's Alipay, the third-party mobile payment tool that contains Mayi Jiebei.

Han borrowed the money to cover her plastic surgery costs. "I'm a little short of money, but I don't want to borrow it from my parents or friends because I hope to keep it [the surgery] a secret," she told the Global Times on Monday.

When borrowing the money, Han was informed by Mayi Jiebei that she will need to pay a monthly interest rate of slightly more than 100 yuan. In total, Han will need to pay an interest rate of 637 yuan to the provider.

Han said she didn't think too much about those numbers. "I know I can pay back the money with my salary, and that's enough. I don't care if I am charged too high or not," she said. Mayi Jiebei declined to comment when reached by the Global Times.

Han is part of an emerging generation whose consumption habits are much more impulsive and daring than their elders, which is driving forward China's cash loan industry.

According to a report published by online loan portal wdzj.com in April, there is no clear definition for a cash loan company, but compared with traditional lenders like banks, their loans are usually free of guarantee or a mortgage and operate faster. The report also noted that nowadays, such services in China are provided by banks, small-credit companies, online peer-to-peer (P2P) lenders as well as consumer finance companies.

Currently, the entire cash loan market is worth between 600 billion yuan and 1 trillion yuan, the wdzj.com report showed.

Li Yi, a senior research fellow at the Internet Research Center under the Shanghai Academy of Social Sciences, said that fast loans have existed for many years in China, but that they have only burgeoned recently due to the country's consumption upgrades, which have stimulated Chinese people's, especially younger people's, consumption desires.

"Many young people, especially those in less privileged regions, are eager to spend money on things they cannot afford, like an iPhone. And cash loan platforms are fulfilling their desires," he told the Global Times on Monday.

'Less profitable than people think'

The Global Times contacted several domestic companies that are currently providing fast credit businesses. But it was discovered that most of them are either staying quiet or trying to steer clear of the controversial ''cash loan concept''.

A senior executive surnamed Zhao from a Shenzhen-based company that provides mortgage-free credit to small enterprises, stressed to the Global Times on Tuesday that his company is different from most cash loan enterprises as it does not provide online services.

Meng Qingfeng, marketing director at CredEx Fintech, an app that helps customers borrow money from financial institutions, said that CredEx Fintech should not be considered a cash loan company because, for example, "it does not engage in short-term, high-interest lending."

When contacted by the Global Times, Cashbus, a Shanghai-based company that provides a fast, mortgage-free credit business, refused to comment.

Public attention and controversy peaked when Beijing-based online lender Qudian Inc made its debut on the New York Stock Exchange on October 18, raising $900 million. The company was evaluated at $28.43 per share as of press time. Financial figures revealed by Qudian also show that the company earned about 973 million yuan alone in the first half of 2017, compared with 577 million in the last full year.

"Qudian's 'overt success' has aroused much public attention. But I believe this is just typical of the industry in that many cash loan companies, even some that are not as popular, are earning even more," Li said.

Echoing Li's comment, Shanghai-based P2P lending platform ppdai.com earned net profits of more than 1 billion yuan in the first six months of this year, compared with net profits of 502 million yuan in 2016.

The company filed for an IPO in New York on October 13, according to the company's prospectus.

However, Zhao opined that the industry is not as profitable as many people think, and said that quite a few cash loan companies he knows ''don't even make money.''

"Especially for newcomers, their cost of attaining network flow is higher, and reliable customers are already grasped by the older and bigger players," he noted.

He said that there are plenty of loan services providers in big Chinese cities.

"Now, we are thinking of tapping smaller cities, where those services are still rare and where it's easier to make money," he noted.

Extortionate interest rates

Controversy has also been generated as a result of the polarized interest rates charged by different domestic lenders within the industry.

According to a report published by online loan news portal p2peye.com in April, the annualized interest rates charged by domestic lenders range from about 15 percent to more than 350 percent.

The Global Times observed that most domestic cash loan platforms avoid clarifying annualized interest rates to customers. For example, on cash loan app Caocaodai, it merely informs borrowers of a total "borrowing cost" without mentioning any interest rate.

Meng said that calculating annualized interest is "a little complicated". He also noted that CredEx Fintech's interest level is lower compared with many other companies in the industry, thanks to the company's ability to establish a risk-control mechanism that fends off people that are more likely to default.

But he said that for most companies, especially those that lend short-term loans to the young working class, social groups that are less capable of repaying their debts, the companies nevertheless have to charge them relatively high interest rates in order to cover possible risks.

In China, annualized interest higher than 36 percent is not recognized by the law.

"Most cash loan companies would make a loss if they charged an interest lower than 36 percent," Meng said, adding that the cash loan companies' business costs, including capital costs, management costs and risk-control costs, are very high.

Zhao also said that implementing the 36 percent benchmark for cash loan companies is "unrealistic," unless they can get very reliable customers and extend their lending periods. But super-high interest rates have also caused anxiety among both lenders and borrowers, such as concerns over the risk of defaults. 

According to Zhao, wide-scale risks have not yet emerged in the cash loan sector in China, unlike in other countries and regions.

"Maybe that's why the government is still tolerant of the industry, even though many lenders are charging an interest rate higher than what the law stipulates," he noted.



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