Ranking first in net profit among licensed consumer financial companies, usually referred to those issuing larger loans, was Bank of China. Suning Consumer Finance Co, a small online loan company known for providing personal consumer loans, issuance of financial bonds, as well as other consumer financial products, also earned the most profit in its category. Most companies like Suning, who hold the small loan license plate, are listed companies with a customer-base linked mainly to the industrial chain, commonly medium-sized micro enterprises and individual users. These small online loan companies can also carry out consumer finance business via the Internet, which is recently where risk is most prevalent.
Although consumer finance has been popularly referred to as ‘the hottest financial segment’ in recent years with its strong profitability trends, and has attracted the entry of many banks, listed companies, e-commerce and other institutions, the issue of risk control and regulation becomes an increasingly significant topic to consider. The asset-liability ratio of companies engaged in consumer finance is usually higher than that of P2P network lending institutions and loan-making institutions. This is because the licensed consumer finance companies engage in lending through the use of their own funds, by debt collection through inter-bank borrowing and by the issuance of financial bonds which means they are highly leveraged and this in return, associates them with a much higher percentage of risk.
Previously, the growth of the consumer credit sector was encouraged by authorities in their efforts to rebalance the economy towards consumer spending. However, as part of a campaign to reduce the possibility of financial risks, the Financial Times reported on October 2017, that China is set to tighten the regulations around consumer finance. These regulations do in fact come at a time when many Chinese Fintech companies have their sights set on going public on the New York Stock Exchange which presents a significant obstacle because US investors are less inclined to buy shares that are under scrutiny for heavier regulation.
Companies, LexinFintech Holdings Ltd and Yixin Group Ltd have high expectations for successful IPO listings. Yixin Group Ltd., an online car-loan provider, has already shown profitable rates with its IPO soaring as much as 32% on its first day of trading. These consumer lending platforms are seen to be quite trustworthy due to low levels of default, despite relatively high interest rates and the absence of a national credit rating agency for individual borrowers.
Although there seems to be much trust in the consumer finance industry, the experience of companies such as Qudian Inc., a micro-lender, has brought about much alert. Recently, one of China’s most influential financial media groups, Caixin, conducted an interview with the founder of Qudian which created speculation about the company’s interest rates being so high which allowed them to ignore defaults rather than attempting to collect. This month it was reported by Bloomberg news that allegations such as these, where micro-lenders were charging excessive interest rates, have urged Chinese regulators to consider a tightening regulations on the sector.
In an attempt to control the industry, many regulatory bodies prompted the release of several policy documents in 2016. These documents were mainly aimed at tackling violations such as fraud, ensuring product appropriateness, and protecting vulnerable customers who were prone to consequences having failed to pay back loans on time. Apart from this, P2P lending and online wealth management were also areas that were heavily targeted in the released documents, as they also presented great risks when it comes to consumer finance.
Although there has been much support for P2P lenders to move into consumer finance, new risks have presented themselves. Many of these lending platforms have taken on this new industry but lack the appropriate risk management skills. Usually, in China, people who are in need of quick cash, don’t consider the systematic risks associated with borrowing small amounts from several different lenders but it is a common practice that has caused many regulators to increasingly worry.
Just a few years ago, China did not have an industry dedicated to home loans which makes it quite impressive that in 2016, home credit’s return on average equity experienced an increase of 16.2%. Even more impressive, in July of this year, monthly lending reached US $2 billion in June. The growth of the home loans industry coupled with a low rate of household debt has however, brought about some speculation as it relates to irresponsible lending practices online. This can be seen with the 3-year increase of outstanding consumer loans. A comparison of growth in 2016 and 2017 shows that during the first nine months of this year, outstanding loans grew by 1.49 trillion RMB compared to an increase of only 830 RMB for all of 2016.
With figures such as these, an increase in public doubts about the operations of the online leading models is prone to occur, which is why regulators have been pushed to prevent and resolve the related risks. Regulatory risk may possibly be lower for consumer lenders like LexinFintech and Yixin, since they receive most of their funding from trusted sources. Regardless, these regulations will still remain a threat to all consumer lenders, even those that enjoy considerable support from tech giants such as Tencent or JD.com.