Bad Debt Grows Along With Loans to Riskier Borrowers

(Beijing) — The demand for consumer finance in China is on the rise as specialized firms compete with online lenders and microfinance companies, but so too is the level of bad debt associated with the increasingly profitable sector.

The number of consumer finance firms in China hit 20 on April 12, when Bank of Jiangsu Co. Ltd., KGI Bank, Jiangsu-based clothing retailer Heilan Home Co. Ltd. and internet company Shanghai 2345 Network Holding Group Co. Ltd. pooled 600 million yuan ($87 million) to create a new lender.

The first consumer finance companies in China were introduced in 2010 to help wean the economy off exports. These firms have lower requirements for loan guarantees compared with banks, but charge higher interest for the increased risk they assume.

The level of risk has increased in recent years. According to statistics from the banking regulator, consumer finance firms saw 4.11% in bad loans by the third quarter of 2016, an increase from 2.85% in 2015 and 1.56% in 2014. Microfinance companies and online personal finance platforms had even higher rates for bad debt at 5% and 10% respectively in 2016, according to estimates from brokerage GF Securities.

Of the 20 consumer finance companies, only four are majority-owned by companies, including appliance maker Haier Group Corp. and retailer Suning Commerce Group Co. Ltd., rather than commercial banks. Performance has been uneven, but bank-backed firms have outperformed those primarily funded by companies, according to annual reports.

Regulators have struggled to rein in risk in the personal-loan industry. Analysts told Caixin that while there are 20 registered consumer finance firms, many more operate without licenses. Informal personal loans recently made headlines when students were asked to use nude photos as guarantees in the so-called campus-loan scandals. Some photos were released to the public or to family members when debtors failed to pay. Loan providers also used more pernicious tactics such as blackmailing debtors by threatening to tell classmates and teachers about their financial situation.

Personal credit histories are still in their infancy in China. Most banks do not hold records of clients’ credit scores, instead granting loans and lines of credit based on customers’ income, other liabilities and ability to provide collateral. Consumer credit will likely be incorporated into China’s ambitious social credit system, which aims to grade citizens based on their financial, legal and political histories.

Contact Liu Xiao (liuxiao@caixin.com)