Authorities take measures to fend off risks in the online lending sector

Source:Global Times Published: 2017/11/29 18:03:39

File photo: IC


The online cash loan industry is growing rapidly in China, boosted by the country's expanding consumption power. But problems have also arisen, as small lenders that do not hold licenses have rushed in and offered loans to borrowers without pre-selecting, driving up financial risks. As such, authorities have been drafting rules to fend off such issues, and a nationwide crackdown has already started, firstly by suspending new license issuances. Analysts predict that the new regulation could also focus on setting up a unified standard for issuing licenses, reducing the industry's high leverage ratio and limiting maximum annual interest rates.  

A nationwide crackdown on China's fast-growing small and unsecured online lending sector, known as "cash loans," is underway.

In recent days, the People's Bank of China (PBC), the country's central bank, along with the Financial Stability and Development Committee under the State Council, China's cabinet, has sought advice from local financial authorities and drafted detailed plans to tighten grips on the sector, weekly financial news publication Caixin reported on Monday.

Following the move, the online cash loan sector could face the most "stringent-ever supervision" in the coming months, said the report, quoting a source close to the matter.

"Small lenders who have not been granted licenses are being ordered to immediately stop offering loans. And even for those that have already obtained permits, the government is likely to review their qualifications under the new rule regardless," said the source.

As the start of the crackdown, the National Internet Finance Association (NIFA) issued an urgent notice on November 21, restricting the granting of new approvals to micro-loan firms and stressing that small lenders should not operate cross-provincially, the Xinhua News Agency reported. 

Later on November 22, the PBC, officials from the China Banking Regulatory Commission and local governments from 17 provinces held an emergency meeting to discuss developments and regulations involving the online lending sector, financial news website reported.

On Friday, the NIFA urged "unqualified institutions to stop using deceptive advertising to attract clients, conducting coercive debt collection as well as charging high interest rates and fees," a warning notice on its website said.  

Chinese online finance firms are waiting anxiously for the new regulation, gauging its inhibiting effect on their businesses. 

An executive from a lending firm based in Southwest China's Chongqing Municipality said that "the company has convened several closed-door meetings to discuss different plans under possible policy directions," said the Caixin report. 

While the regulation looms, shares of US-listed Chinese small lenders have been plummeting in recent weeks. For example, Qudian lost 24.3 percent on Friday, while two other online lenders, Jianpu Technology and Yirendai, lost 15 percent and 10 percent, respectively, during Friday's closing. 

Mounting risks

China's cash loan sector was brought into the spotlight after online provider of small cash credit products Qudian became listed on the New York Stock Exchange on October 19, arousing domestic investors' appetites. 

On the day Qudian was listed, the company's share price surged by more than 20 percent from its initial pricing, raking up a market capitalization of $10 billion. And according to its IPO prospectus, the company's profit by the end of the third quarter also stood at 650 million yuan ($98.38 million), up 321.8 percent year-on-year.

Less than a month after Qudian's listing, eight Chinese companies including online food ordering platform and tech giant Sina have announced plans to set up online micro-lending firms - but most of them do not own a lending license, meaning they are not qualified to enter the industry, said the Caixin report.

As of November 17, a total of 2,639 online lending firms had been set up, according to data released by the National Committee of Experts on Internet Financial Security Technology. However, only 242 of them had lending licenses as of November 6, some had not even completed the registration process, exposing the problem of amassing unqualified players, the report noted. 

Those unqualified players do not employ financial risk control tools based on big data, which in turn is exacerbating industry woes, according to Ji Shaofeng, president of small lender Wufeng Information Technology based in East China's Jiangsu Province.

"Such companies only pursue ballooning profits and hold the philosophy of scooping up one ticket… they don't care about whether users borrow from multiple sources," Ji said, stressing that unqualified lenders drive up the industry's bad loan ratio. 

But that is just the tip of the iceberg when it comes to potential financial risks. 

Currently, China's cash loan market is estimated to reach 600 billion yuan in value by the end of 2017, an important capital source which originates from various financial institutions that look to improve their profitability through off-balance-sheet activities, said the Caixin report.

"A number of banks and trust funds have cooperated with online lenders. They deemed us as a channel to directly issue loans to consumers," an executive from an online lending firm said, noting that the financial risks have, therefore, extended from the cash loan sector to the country's wider financial system. 

What is worse is that the expanding market has also given birth to a grey-area industry of violent debt collection, the Caixin report quoted an industry insider as saying. 

Government supervision 

Since June, a total of 10 million illegal cases of debt collection have been reported, involving 920,000 victims, according to data released by the National Committee of Experts on Internet Financial Security Technology.

To tackle those issues, crackdowns on the cash loan sector have recently stormed in, starting with the halting of new license issuances. 

Industry insiders said that the next step would be a review on licenses already obtained by small lenders led by central authorities.

Under the current rule, the application for a lending license is approved by local regulators, "which gives leeway to local authorities who could otherwise decide on the matter by themselves without a clear standard," therefore enabling corrupt behavior, the Caixin report quoted a government official as saying.

To alleviate such a situation, central regulators are now mulling over a unified standard based on which Internet financing firms could obtain licenses, according to several sources close to the matter. And online lenders which have acquired licenses but failed to meet those qualifications could nevertheless be forced out of the market. 

The standards could include whether or not lenders' registered capitals are real, whether their funds have been in custody by a third party and whether they have allocated a certain amount of provisions, said the sources.

Another priority for the regulators is to lower the industry's leverage ratio, as some small lenders have exceeded the stipulated maximum in-balance-sheet leverage ratio through cooperating with financial institutions, according to Hui Guang, secretary-general of the Internet Finance Institution in Shenzhen, South China's Guangdong Province. 

But some industry insiders slam such "one-size-fits-all" policy, claiming that "small lenders' bad loan ratio would climb up without ongoing capital injection from financial institutions," leading to more financial risks in the country. 

Chinese authorities will also consider imposing a limit on the annual lending interest rate, probably at a cap of 36 percent, sources told Caixin. 

However, it is not clear whether such a policy can achieve the desired results, as lenders may take advantage of supervision loopholes, analysts said. 

Newspaper headline: Cash loan crackdown

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