As Number of Microlenders in China Grow, So Do Risks

In China, even department stores are getting into microlending these days.

Facing a crowded market, lenders are growing unconventional in their scramble for funds to meet swelling demand. The conventional fundraising method for microlenders is to raise funds from their own shareholders and venture capital investors, although China’s consumer-finance market has grown so quickly that trusts and smaller banks are now flocking to the sector.

Since late last year, a handful of very small commercial banks made a foray into the business by filling the funding gap in the high-interest — and therefore high-risk — microlending business. Instead of being the lenders themselves, they act as middlemen, repackaging money provided by themselves, other banks and sometimes even other better-funded peer-to-peer (P2P) lenders into bigger funding pools from which microlenders draw their money.

For both the middlemen and banks that offer funding, it is a calculated partnership. The middlemen earn a fat fee by offering cheaper loans in high volumes to microlenders, while banks offering funding would have more exposure to a retail business that usually offers meatier profits than corporate loans.

“Banks are facing pressure on revenue growth,” a risk-management officer at a city commercial bank told Caixin.

“Products with highest returns these days? The unsecured consumer loans of course,” the officer said.

Local and rural commercial banks appear keen to be the middlemen in the sprawling microlending business.

For instance, online microlending service provider iDumiao has tied up with a small lender XWBank in Sichuang province as its funding source. The scandal-hit Qudian Inc., a microlender which recently completed a $900 million listing in New York, also has 40% of its money sourced from “various banks,” according to previous remarks by CEO Luo Min.

Trust companies are also trying to grab a piece of the growing pie of microloans. Major players include Yunnan International Trust Co., China Foreign Economy and Trade Trust Co. and Avic Trust Co.

Qudian, for instance, had raised over 1 billion yuan ($150.6 million) by selling trust plans through Bohai Trust Co. Essentially, these funds are raised at a 15% interest rate after taking account of other costs. To Bohai Trust, which is the middlemen here, there is something of a guarantee of risk protection, as Qudian has promised to buy back the trust from investors if its bad-loan ratio climbs above 4%, sources told Caixin.

“But that doesn’t mean the risks are gone. As the microlending business keeps surging, it’s time to ask the question about intermediate lenders’ capability of absorbing risks,” said Xue Hongyan, director of Suning Financial Research Institute, the research arm of one of China’s largest fintech service providers.

This is a perennial problem when one loan goes sour, risks of default could spread more widely now that more parties are involved.

“The emergence of middleman lenders could be seen as the subcategory of the microlending industry. But the market should think about regulations together with the development,” a senior management executive of an internet financial company told Caixin.

China’s banking regulator 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, Caixin reported earlier, although the rules do not apply to middleman lenders.

Contact reporter Leng Cheng (chengleng@caixin.com)