Top Regulators Discuss More Tightening Over Microlenders

Chinese regulators are taking more steps to boost oversight of the booming microlending industry, following a freeze in new licenses rolled out earlier this week for the rapidly-expanding internet finance sector.

The central bank and the China Banking Regulatory Commission (CBRC) on Thursday called a special meeting in Beijing with financial regulatory officials from 17 provinces to discuss the issue, sources close to the regulators told Caixin. All 17 have granted past approval to online microlenders, including south China's Guangdong province and the Chongqing municipality in the southwest.

The sources told Caixin the central bank has drafted regulations to govern the online microlenders, whose loans often are less than $1,000. Such regulations will require companies to only use their own capital for lending and restrict their leverage ratio, said an official close to the central government regulatory body. Such lenders can currently get outside funding from a variety of third-party sources, including banks and trusts.

“Unlicensed microloan businesses will be tightly restricted and stop operations immediately … while those with licenses will be reassessed,” said an official close to the central government office assigned to oversee risks in the internet finance sector.

As of September, more than 8,600 microlenders were operating in the county, with total outstanding loans worth 970.4 billion yuan ($146.1 billion). Only about 220 companies had licenses for online microlending.

Earlier this week, the central government released a policy notice that called for a temporary halt in approving licenses for microlenders, as well as cross-province lending.

Sources close to the matter also said that regulators will release unified rules for the industry and set higher barriers to entry for online microlenders. Companies that do not meet the new standards will need to cease operations, the sources said.

The regulatory moves come amid growing concerns over the fast-growing industry. Credit services offered by the online microlending platforms often involve small, unsecured loans with periods of six months or less targeting students, rural migrants and blue-collar workers who typically lack access to other credit. Some lenders charge annualized interest of more than 100% despite advertising seemingly low daily rates.

In a Thursday commentary, the Communist Party’s official newspaper, the People’s Daily, said the low bar for borrowing from the new generation of private microlenders has led people to “borrow blindly” and raises the risk of bad loans.

While most of China’s financial service licenses are issued by national regulators such as the central bank and CBRC, authorization for microlenders is handed out by local governments, triggering concerns over inadequate oversight.

“Those with licenses issued by one local government should not do business across the country,” said one official. But he added it will be challenging to effectively supervise microloan companies’ cross-regional operations due to the ease of conducting such business over the internet.

A commercial bank manager suggested that online microlenders with cross-regional business should be supervised by a national regulatory body and follow requirements for capital adequacy and risk reserves.

The regulatory storm has sparked a selloff in shares of U.S. listed microlenders One of the largest, Qudian Inc., has dropped nearly 33% from its IPO price last month. Another major player, Ppdai Group Inc. has seen its shares tumble 37% from its IPO price earlier this month.

Several firms, including Shenzhen-listed Zhejiang Busen Garments Co. and payment-terminal maker Nexgo Inc., have scrapped plans to expand into online microlending business due to the regulatory pressure.

Contact reporter Han Wei (weihan@caixin.com)