Rules tighten in e-lending to cut risks

The latest regulatory requirements for commercial banks' online lending facilitated by third-party partners will encourage fintech companies to cooperate with banks in customer acquisition and risk control areas, or form technology partnerships with banks while discouraging third parties to offer joint loans with banks, experts said.

The China Banking and Insurance Regulatory Commission, the country's top banking and insurance regulator, issued a notice on Saturday outlining detailed requirements and quantitative indicators to further regulate commercial banks' online lending business, to promote healthy development of the business and effectively prevent financial risks.

According to the requirements, for each loan jointly offered by a commercial bank and a partner, the partner must provide no less than 30 percent of the loan funds. Third-party partners involved in joint lending are usually large internet platforms like Ant Group, an affiliate fintech company of China's e-commerce giant Alibaba.

In addition, the CBIRC set the upper limit for the balance of loans jointly offered by a commercial bank and each of its partners at 25 percent of the bank's net tier-1 capital. The regulator also capped the balance of joint loans provided by a bank and all of its partners at 50 percent of the bank's outstanding loan balance.

By setting upper limits on joint lending quotas and the degree of joint loan concentration in banks' portfolios, the regulator is trying to restrict the level of possible risks that may occur during banks' cooperation with each partner. At the same time, the regulator also required banks to build their own essential risk management capability, said Zeng Gang, deputy director-general of the National Institution for Finance and Development.

"The newly issued requirements will force banks' partners providing part of the joint loan funds to increase their contribution portion and will eventually help the partnering institutions lower their leverage ratios," Zeng said.

"If the leverage ratio of a partnering institution becomes too high, it may bring huge potential financial risks. Moreover, if the institution is systemically important, risks related to its excessively high leverage ratio may lead to systemic risks."

Ma Xiangyun, an analyst at Soochow Securities, said in a report that the new policy is not favorable for internet giants, as it means their joint lending quotas with each bank will be restricted by the bank's capital scale. It will also bring temporary shocks to small and medium-sized banks, forcing them to partner with more internet platforms, rather than acquiring assets from only one large platform.

However, the policy is favorable to leading banks whose right to speak will improve amid cooperation with internet platforms, as they have more joint lending quotas due to the large size of their capital. In addition, the policy will bring more opportunities for the fintech companies that partner with banks in customer acquisition, risk control and technology cooperation, Ma said.

The regulator also forbade regional banks from conducting online lending business facilitated by their partners outside their home regions. Previously, some regional banks in central and western China offered loans to businesses and individuals in southeastern coastal regions, where there is higher demand for loans, by using third-party facilitated online lending as a way of circumventing regional regulation and capturing profit opportunities created by different regulations, experts said.

After the new rules come into effect, small and medium-sized regional banks can hardly rely on this type of business for expansion, whereas nationwide banks will benefit from the latest requirements, Ma said.

However, banks that have no physical outlets and mainly conduct business online, such as Tencent-backed WeBank and Alibaba-backed MYbank, are exempted from the restriction on cross-regional online lending, Ma said.

In a research note issued on Sunday, Citi said: "We think the new rules can prevent banks from being over relying on online lenders for credit assessment and over-concentrating on selective fintech partners. It also effectively closes the regulatory loophole for regional banks to expand out of home regions via online lending."

Citi expects the new regulations to benefit nationwide banks, given that they may face less competition from Big Techs, and to reduce systemic risks so that they will not become pure funding channels.