Consumer loan product boom may fizzle out on debt norms

Boom in China's consumer loan securitization could pause this year as regulators target lenders' high debt levels and limited asset disclosure.

But the regulators' new emphasis is unlikely to hinder Beijing's long-term goal of developing consumer finance within legal limits to drive high-quality spending, according to industry insiders.

Rules announced last month by banking authorities limited the amount lending companies loan. They were also required to consolidate such loans on their balance sheets.

This would put a dent in the books of China's internet firms, such as Ant Financial Services Group and JD Finance, which have issued securities backed by microloans.

In the first three quarters of 2017, the volume of securities backed by consumer loans reached 160.8 billion yuan ($24.7 billion), jumping 4.4 times year-on-year, according to data compiled by China Securitization Forum, a trade group.

Among them, Ant Financial was the largest issuer, with its Jiebei and Huabei loan and credit services combining 31.8 percent of the total market value.

In light of the new rules, the company confirmed with China Daily that it would increase registered capital in its two consumer loan units from the current 3.8 billion yuan to 12 billion yuan.

Reuters reported earlier that Ant has withdrawn plans to issue asset-backed notes worth billions of dollars. The company attributed such cancellation to "tight funding conditions and rising pricing on the bond market" at the end of 2017.

China's millennial consumers have increasingly jumped onto the "buy-now-pay-later" bandwagon. One in four of those aged 18 to 27 in China use credit services offered by Ant.

The main purpose for packaging loans into securities is to transfer the lenders' loans off their balance sheet, therefore bypassing regulatory rules stipulating how much they can lend in proportion to equity capital, said Li Chao, a financial technology specialist at iResearch.

"Normally, the ratio of total financing to capital is between 1.5 to 3 times, based on local banking regulations," Li said. "In Ant's case, it is apparently far beyond leverage requirements."

Efforts to tame non-compliant loan products are essential, as many private sales take place on local financial exchanges and equity trading centers, making them difficult to track and assess, said Guo Yonggang, general manager of the structured financing department at Golden Credit Rating International Co.

But multiple industry insiders said the tightened rules would not dampen consumer loans as long as they are lawful.

"After all, consumption upgrade is the trend that holds key to China's economic growth," said an executive at a web-based consumption loan platform in Beijing.

While massive in scale, the majority of loan products offered by the likes of Ant or JD are still healthy, thanks to technology advancement that helps phase out potential risks, said Liang Lulu, an expert on asset-backed securitization at Industrial Bank Co Ltd.