Chinese technology faces new limits to connect banks and borrowers
Chinese internet lenders face another setback, with potential restrictions on paid activities that could push them to take more risk with their own balance sheets.
Regulators are considering tougher rules on what’s known as loan facilitation, people familiar with the matter said. In this system, internet lending platforms assess borrowers, match them with lenders, and sometimes help with risk management for outstanding loans, but do not put any capital at risk.
The potential changes would come on top of restrictions placed on the industry’s other main model, co-lending in partnership with banks. Rules released in February require internet groups to fund at least 30% of co-lending loans themselves by 2022. Previously, they were able to contribute a slice of capital and take a sizable chunk of the profits. of these unsecured loans.
Overall, the authorities want to ensure that online platforms have a skin in the game, that banks have good control over the risks they run and that consumer data is not misused. Beijing is concerned with both financial stability and controlling Western-style borrowing and spending habits among the younger generations.
Officials from the central bank and China Banking and Insurance Regulatory Commission, as well as advisers to these bodies, have consulted with the industry in recent months and have made it clear their negative stance on loan facilitation, the officials said. sources.
Regulators plan to introduce a definition of the practice, the people said. This would only cover simple arrangements where platforms connect borrowers and lenders while banks do their own risk assessment and deal with issues like overdue repayments.
In other cases, capital requirements similar to those of the co-loan would apply. Another likely outcome: much lower fees for basic loan facilitation.
The People’s Bank of China said the relevant work was being led by the banking and insurance regulator and declined to comment further. The regulator did not respond to a request for comment.
The changes could affect Ant Group Co., Jack Ma’s beleaguered fintech giant, but will likely be more difficult for its smaller competitors, many of which are listed in the U.S. Some of these companies have recently capitalized on the challenges Ant is facing to increase its market share recently, and their stock prices have skyrocketed.
The forward-looking rules could also pose problems for small banks in China, which are often ill-equipped to assess the creditworthiness of new customers or to hunt delinquent borrowers.
Ji Shaofeng, a microcredit industry commentator and former banking regulator in east China’s Jiangsu Province, said the outstanding consumer debt taken out under the facilitation model could reach highs. hundreds of billions of dollars.
âPeople are holding their breath because those inside the circle are all aware of this huge loophole that requires the work of regulators,â Ji said.
Such rules, if implemented, would be a blow to small banks and fintech firms, said Daniel Zhi, a partner at KPMG China who heads its financial strategy advisory service.
âMedium and small banks generally do not have sufficient independent resources to deal with risk control and delinquency,â Zhi said. He said that more than 80% of outstanding internet loans rely mainly on data and risk control systems of fintech companies.
Chinese consumers had the equivalent of $ 1.31 trillion in short-term loans outstanding in February, official data showed. A precise breakdown is not available, but a significant portion of this debt has been extended based on risk assessments carried out primarily by fintech groups, although most of the funding comes from financial institutions.
The changes might create less difficulty for Ant than for some others, as he focuses more on co-lending. Although the co-loan locks in the principal, it can lead to interest payments and fees and allows the fintech partner to share less data. Ant has also sometimes passed on the risk by repackaging the loans into asset-backed securities.
The value of Ant’s current co-loan loans is more than double that of the loans it has facilitated, people familiar with the matter said. In contrast, groups such as Lufax Holding Ltd., listed in the United States, 360 DigiTech Inc. and LexinFintech Holdings Ltd. focused on facilitating loans.
Ant, Lufax, 360 DigiTech, and LexinFintech declined to comment.
In some cases, Internet lenders have otherwise adapted their business. For example, loan facilitation can be combined with credit guarantees to help reduce risk for banks. Lufax, which is unusual in its focus on small business lending, says it has moved to “a more sustainable risk-sharing business model” and that by mid-year a subsidiary would guarantee a fifth of the loans from which it originated.
However, such arrangements are likely to be replaced by a unified capital requirement, said Mr. Zhi of KPMG.
There may be other regulatory changes to come. A January central bank document urged institutions to collect as little information as possible when assessing credit scores for small businesses and individuals. If rules to this effect are introduced, it could make it more difficult for platforms to identify the right customers and refer them to banks.
Chinese authorities had raised concerns about the risk-sharing and use of consumer data by internet companies even before they suspended Ant’s successful initial public offering in November, said Kevin Kwek, analyst at Sanford C. Bernstein. âIt looks like we haven’t quite finished the regulatory sweep yet,â he said.
Write to Xie Yu at [email protected]
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