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China's non-bank consumer lenders face challenges on tightened regulations: Fitch

September 14,2018

   
   

China’s non-bank consumer lenders will face challenges and regulatory risks as the government institutes a wider regulatory crackdown on shadow banking activities, Fitch Ratings said yesterday.

After growing exuberantly from 2015 to 2017, China’s non-bank consumer lending — including consumer finance, micro-credit companies, peer-to-peer platforms and on-line finance companies — has heightened the risks to social and financial stability, and created potential contagion risks for the country’s financial system, Fitch said in its latest special report.

The rating agency estimates that non-bank consumer loans have doubled to around 3 trillion yuan (US$440 billion) from the end of 2015 to the first half of 2018, and attributed the industry’s proliferation to growing demand for retail financing, the government’s promotion of inclusive finance as well as greater access for consumers via new online delivery platforms.

However, Fitch noted that the loan figure remains small and equivalent to only 2 percent of loans extended by the traditional banking system.

One factor behind the popularity of online non-bank consumer lenders is that they target an under-banked, low-income population who have higher credit-risk characteristics. Most also would not have a credit history or access to traditional credit facilities, Fitch said.

The greater regulatory scrutiny has sharply slowed the sector, and many irregular players were forced to exit the market, the report said. Fitch added that strict implementation of 36 percent for cash loans annually limited the profitability for the online lenders who focused on high-risk borrowers.

But Fitch takes a positive long-term view on the tighter scrutiny as the agency believes these measures will raise entry barriers and help curb malpractices that create risks to the system.

The sector’s growth is seen to resume in 2019, according to the rating agency.