China’s Private Banks May Not Be Allowed to Work With Unlicensed Lenders to Make Loans

China is considering forbidding privately owned banks from joining with unlicensed lenders to create larger loan pools — the central government’s latest effort to pre-empt credit risks outside the mainstream banking system.

Privately owned banks, which are usually small, often struggle with limited access to the funding they need to make loans. Over the past several years, these banks usually teamed up with other financial institutions, some of which were unlicensed lenders, to create a large enough pool of loans. For instance, Weilidai, a key product of WeBank, teamed up with 25 banks to fund about 80% of its loan portfolio.

The problem with this joint-lending practice is that unlicensed lenders may introduce new risks to the broader financial system, market watchers said. They added that the rules are more of a pre-emptive nature, as so far the loan quality in that pool seems intact.

The China Banking Regulatory Commission (CBRC) has recently proposed segregating licensed but smaller privately owned banks from unlicensed but potentially more-resourceful lenders, according to the regulator’s draft rules, which were seen by Caixin.

The CBRC also laid out strategies of risk and big-data management in the document, including regular reporting of online-lending operation to the regulator.

The CBRC didn’t respond to Caixin’s inquiry on the draft on Thursday.

Privately owned banks were created beginning in 2014 as the government tried to groom a new class of lenders to cater small and midsize businesses. To date there are 17 such banks. Major ones include WeBank, the country’s first internet-only bank, whose founders include Tencent Holdings Ltd.; and MyBank, operated by Alibaba’s Ant Financial Services Group.

Contact reporter Leng Cheng (chengleng@caixin.com)