Approval of New Online Microlenders Suspended Amid Risk Concerns

The Chinese government is suspending license approvals for online small loan companies, a first step toward tightening regulation of online consumer lending amid concerns of financial risks.

In a policy notice issued Tuesday, a central government body assigned to rein in risks in the Internet finance sector told local regulators to stop issuing licenses to online micro loan companies. The notice also restricts new approvals for micro loan companies to conduct lending across provinces.

The regulatory move sent shockwaves through U.S.-listed shares of Chinese online credit companies, including Qudian, the online lender backed by Alibaba Group affiliate Ant Financial.

Shares of Qudian, which debuted last month in the largest initial public offering in the U.S. by a Chinese company this year, sank more than 13% in early trading before recovering to around $18 a share, below its IPO price of $24.

Shares of PPDAI Group, another Chinese peer-to-peer online lending platform that went public Nov. 10, plunged 14% to $10.76, also below its IPO price of $13.

A source close to the central bank told Caixin that the license ban is only the first step the government took to tighten regulation of online microlenders, which usually target those who don't have access to conventional lending, such as students, rural migrants and blue-collar workers.

Often known as “cash loans,” the credit services offered by many of the lending platforms involve small, unsecured loans with periods of six months or less. The lenders charge annualized interest rates that exceed 100% despite advertising seemingly low daily interest rates. A recent report issued by China’s National Committee of Experts on Internet Financial Security Technology, a government-backed industry organization, estimated that there were 2,693 online platforms in China offering short-term loans to nearly 10 million clients.

China’s central bank and the China Banking Regulatory Commission are drafting a detailed regulatory framework on the online cash loan business, according to the source.

The notice said some companies’ online lending business pose large potential risks.

Credit risks are building up as borrowers have been found taking out loans from one lender to roll over previous loans from another, snowballing their debt. Reports of improper sales and loan-collection efforts, as well as ultra-high interest rates are also rife in the fledging sector. Domestic media have reported that some online micro-lenders are charging interest rates as high as 1,000%.

As of September, more than 8,600 microlenders were operating in the county, of which only about 220 companies had licenses for online business. Caixin learned that the regulators would also review the licenses of the 220 companies.