Regulator Steps Up Curbs on Microlenders, Sets Higher Entry Barriers

Regulators in China are gearing up to tackle risks in the booming microloan industry.

To hold back the sector, cooperation between banks and microlenders will be temporarily suspended, sources close to a central government body tasked with monitoring internet finance risk told Caixin.

On Tuesday, the same central government body released a formal document that called for a temporary halt in approving licenses for microloan companies, as well as cross-province lending.

Next, regulators will release unified regulations for the industry and set a higher barrier to entry for online microlending firms, sources close to the central government body told Caixin. Companies that do not meet the new standards will need to cease operations, the sources said.

The unsecured, short-term loan industry has already surpassed 1 trillion yuan ($151 billion), according to statistics released earlier this month by research firm Wangdai Zhijia — Chinese for “Online Lending House.”

The sources of funds for microlenders can come from shareholders, banks and other financial institutions such as trusts that take deposits from the public, and from issuing asset-backed securities. Often, when microloan firms work with banks, they recommend those financial institutions to borrowers for a fee.

Based on the contracts signed between these microlenders and funders, default risks of borrowers are actually absorbed by microlenders themselves, not other funding sources behind them. The bank is essentially extending credit to microlenders, a source close to regulators explained.

Draft measures on online microloan management is currently being reviewed internally at the China Banking Regulatory Commission, multiple sources told Caixin.

The draft measures propose barring banks from working with unlicensed microloan companies to provide loans. It is unclear when the draft will be publicized, but it would represent further strengthening from previously proposed measures — seen by Caixin in August — that would only affect privately owned banks.

Contact reporter Liu Xiao (liuxiao@caixin.com)