Definitions
Micro Credit in China is designed as a small loan product to support SME or individual borrowing, without a specific collateral requirement. In China, it is normally called "cash loans," originally from the idea of a Payday Loan. The China National Committee of Experts on the Internet Financial Security Technology has defined Micro Lending service as: ‘a platform which lends small amount of cash to borrowers that should be paid back within a short period, normally in half a year’.
The micro lending market in China is estimated to be over 1 trillion RMB in 2017, increasing at an astounding rate. In January 2016, the total transaction value was 789 million RMB, yet in October the number reached 2.57 billion. One year later, in October 2017, the transaction amount was 12.12 billion and from just January to October 2017, total transaction number is already five times larger than it was in the whole of 2016.
As of November 19th, 2017, there are in total 2,693 platforms working through websites, WeChat Official Accounts or APPs, providing service to near 10 million users. Of all the platforms, 1,044 companies run their micro lending business through a website.
Currently in China, there are 4 kinds of micro lending players:
- Banks work with technical companies to develop apps or channels to issue micro lending and have the highest requirements on borrowers’ quality, e.g. a stable job, salary and property
- Since 2010, the China Banking Regulatory Commission approved licenses for consumer finance companies. So far there are 25 licensed companies that provide consumption loans and also provide micro lending through in-store purchase, app or website.
- There used to be only offline local small loan companies. Nowadays there are online small loan companies that are able to conduct micro lending business one they hold an internet small loan license.
- P2P platforms are defined as an information exchange platforms, providing investing and borrowing information matching channels for users.
Easy Entry and Unclear Regulation Causes Problems
Setting up a new internet small loan company is easy. Applying for a license is not very strict, due to the fact that the government wants to facilitate financial inclusion. The cost of buying a whole loan system costs in the tens of thousands of RMB, which includes qualification checking, interest rate setting and loan process monitoring.
Many players establish micro lending companies with a long term and legitimate business in mind, however there are plenty in the industry who only want to make quick and easy money. Since it is easy and cheap to enter the market, there are serious problems as a result, specifically regarding small loan companies or P2P platforms. They often do not care about who they are lending the money to, in what ways they lend the money out and how to collect the money back.
High interest rate
According to regulation issued in August 2016, the annual loan rate should be no higher than 36%. Although micro lending provided by online small loan companies or P2P platforms do not set their interest rate higher than 36%, they still charge other fees e.g. account management fee, checking fee and others, which in some cases can lead to over 100% annual interest rate.
Agressive collection
If borrowers pay back in time, there would not be such big repayment pressure. However, if payment is overdue, penalties and double interest rates become a huge burden. To get the money back, companies will use telephone blackmail, as well as visits, pressure on the individual’s family, or other tactics to compell the individual to pay back the money.
Data leaks
Loan companies have information about not just borrowers but also their relatives’ details, as borrowers need to fill out comprehensive forms. Through this, the companies hold an extensive amount of information, which can be sold for 0.5-1 RMB per item to create new revenue.
The Grey Area Is Being Regulated
Specially after Qudian went public in the NYSE, micro lending became a hot topic in China and the existing problems were cause for concern. Some local governments have already taken action. For example, on November 4th, the Chinese Central Bank governor Xiaochuan Zhou, stated that more attention should be raised regarding financial risk. Three days later, the Ministry of Public Security proposed guidance on avoiding criminals in internet finance. On 8th November 2017, China’s Financial Stability and Development Committee was established and in their first meeting, the need for increased risk prevention was a an important topic. Then lately the urgent notice was issued.
Micro lending actually address the untapped market of people who cannot get loans from banks, yet have an urgent need. However, the unreasonably high fees and illegal actions these companies partake in, can make it a usurious business. After the notice issued on Tuesday, the stock price of micro lending companies listed in the NYSE suffered significant falls. This fall from grace is demonstrated by Qudian’s current market value, which equals only 40% of its highest value.
This notice is just the beginning. There is little doubt that more specific regulations will be published soon, most likely addressing the extortionate fees and consequently reshuffling the whole industry.