Cash loan sector to face 'most stringent supervision’
By Li Xuanmin
People's Daily app
1511955426000

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File photo of peer-to-peer lender Ezubao, which was shut donw in 2016 after raising more than 50 billion Chinese yuan ($7.6 billion) from about 900,000 investors

China's fast-growing small and unsecured online lending sector, known as “cash loans,” could face the most “stringent-ever supervision” in the coming months.

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 the advice of local financial authorities and drafted detailed plans to tighten the grip on the sector, weekly financial news publication Caixin reported on Monday.

At 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 across provinces, the Xinhua News Agency reported.

On November 22, 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 yicai.com reported.

The rapidly-expanding sector was brought into the limelight after online provider of small cash credit products Qudian was listed on the New York Stock Exchange on October 19, arousing domestic investors’ appetite.

Then less than a month after Qudian’s listing, eight Chinese companies including online food ordering platform Eleme.com and tech giant Sina 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, 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 yicai.com report said.

Because unqualified players only pursue profits and believe in scooping up one ticket, they neither enforce financial risk control tools based on big data nor care about whether their users borrow from multiple sources, which in turn hurts the industry.

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

What’s worse is that an increasing number of banks and trust funds, which look to improve their profitability through off-balance sheet activities, have cooperated with online lenders and directly issued loans to consumers, according to several industry insiders.

The practice is spreading financial risks from the cash loan sector to the country’s wider financial system.

Crackdowns on the sector have started, as seen from the government’s recent moves. And the first step started with halting the issuance of new licenses.

It is likely 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 leading to corrupt behaviors.

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

The standards could include whether or not lenders’ registered capital is real, whether their funds have been held by a third party and whether they have allocated a certain amount of provisions, financial news website caixin.com reported, citing sources close to the matter.

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.

As part of the tightened supervision, central authorities may closely watch small lenders’ funding sources and even call off cooperation between financial institutions and online lenders, the Caixin report noted.

But such a policy has been criticized by some industry insiders as “one-size-fits-all.” They claimed that small lenders’ bad loan ratio would rise without ongoing capital infusion from financial institutions, leading to greater financial risks in the country.