As small digital lending startups have recently began flourishing across China, government officials are getting ready to exert just a bit more control over them. This crackdown follows a similar move made in recent months to bring more regulatory oversight to P2P lending in China.
Wanda, Ctrip, and LeEco are among the firms that have started pursuing the Chinese small-loan market over the past year, and JD.com said it was spinning off JD Finance. In general, large firms — with large amounts of consumer data to draw from — are the not government's concern when it comes to expanding into lending. Regulators are instead concerned about small lending startups that they fear simply don't know enough about underwriting and risk mitigation to be a safe and productive player in the ecosystem.
“We’ve noticed that some so-called ‘internet small lenders’ or ‘online small lenders’ fundamentally lack a real customer base or real internet technology or big data. They just put out their name and blindly launch their business,” Li Junfeng, director of the financial inclusion department at the China Banking Regulatory Commission, told the small-loan industry association recently.
Among China’s 8,673 small-loan companies, the value of total outstanding loans clocked in at Rmb927bn at the end of 2016, according to government data — notably more than the Rmb673bn outstanding from peer-to-peer lenders, according to Online Lending House.
However, beyond the book value of the loans themselves, there is also the part they play in China's increasingly active securitization market. Securitization of small-loan assets hit Rmb82bn in 2016, up from Rmb13bn a year earlier, according to data from Wind Info.
“These large companies want to cultivate new profit sources, and online small loans are a natural entry point,” says Wang Haimei, analyst at Splendid Profit, a FinTech consultancy in Shanghai. “By lending upstream and downstream in their industry chains, they can consolidate their business relationships.”
The CBRC is preparing new regulations to address rising risks in the industry. In the meantime, provincial authorities have been warned about underwriting in the immediate future. Provincial governments have approved a new wave of online small-loan companies in recent years — and these groups are not subject to regional restrictions.