In Depth: Cheers and Fears in $283 Billion Bank-Tech Lending Tie-Up
The fintech boom has made it easier than ever for Chinese people to borrow money. Consumers receive frequent loan offers via websites or apps, and they can take out a loan with just a few taps on their phones.
The lending market backed by partnerships of banks and tech companies has surged to 2 trillion yuan ($283 billion), Caixin learned from regulatory sources. Hundreds of banks and other financial institutions have joined a game led by Alibaba’s Ant Financial Services Group, Tencent-backed online bank WeBank and Pingan Easy Money, a unit of China’s largest insurer, Ping An Insurance (Group) Co. of China Ltd.
The tie-up of finance and internet technology makes it possible for more people to access banking services anywhere. But as much as it sounds like a win-win, the fintech lending boom raises concerns over risk controls, potential for contagion in a financial crisis, and lagging supervision, industry and regulatory experts say.
“Regulators love (such loan business) as much as they hate it,” a bank loan officer told Caixin.
Earlier this week, the China Banking and Insurance Regulatory Commission (CBIRC) barred institutions that are helping lenders market loans from offering any yield guarantees. It also warned banks to tighten internal risk controls.
Local banking authorities in Zhejiang, Shanghai and Beijing issued guidelines to regulate the joint business involving local banks and ordered lenders to cap the size of such business. However, there’s no clear nationwide regulatory framework governing the new fintech lending industry.
Conventional banks are taking unconventional steps to expand the reach of their lending. Under partnerships with the likes of Ant Financial and Tencent Holdings Ltd., banks provide funds for internet companies to repackage into various loan products — often higher-interest consumer loans — to market to their massive user bases. Sometimes internet companies put their own funds into the lending pool, making some products similar to syndicated loans.
As banks scramble to find high-quality investments amid slowing economic growth, such business is attractive as it creates “astonishing returns with very low bad-loan ratios,” a bank manager said.
Ant Financial, WeBank and Pingan Easy Money account for a combined 90% of the total joint lending market, followed by smaller players including Sichuan-based XWBank, JD.com Inc.’s fintech arm JD Digits and Baidu Inc.
A source from Ant Financial said the company has joined with banks to extend loans worth hundreds of billions of yuan. Ant Financial didn’t comment on the figure when asked by Caixin but said it has formed partnerships with 400 financial institutions and will expand to 1,000 in the next two years.
The risk accountability mechanism for such partnerships is becoming increasingly blurry as some tech partners offer implicit guarantee on returns for banks, making banks simple providers of funds, analysts said. Meanwhile, the rapid expansion of the business is testing institutions’ risk controls and regulators’ oversight, they said.
In addition, partnerships with internet platforms allow many small regional banks to expand beyond their locality, making it more difficult to control risks.
A booming market
Unlike conventional syndicated loans in which banks join each other to provide credit, the new partnerships tie lenders with fintech companies, which often hold microlending licenses. The fintech partner contributes a small portion of the loan or just acts as a middleman between banks and borrowers without providing funds.
Tech companies’ massive pool of potential clients has attracted many small and midsize banks, as well as trust companies, to seek lending partnerships.
Backed by the new business model, a number of city commercial banks reported fast expansion of their loan business in the past year. For instance, Bank of Tianjin Co. Ltd. in 2018 made nearly 80 billion yuan of consumer loans to individual borrowers, a jump from less than 10 billion yuan the previous year, reflecting its foray into the joint lending business.
In addition, nearly 40 trust companies had almost 300 billion yuan of outstanding consumer loans — mainly in partnership with tech firms — by the end of 2018, a rise of 200 billion yuan from a year ago, according to the China Trustee Association.
A Beijing banking regulatory official said smaller financial institutions are seeing rapid business growth in the city amid the accelerating combination of financial and internet services. But problems are also emerging due to lax risk controls and flaws in business compliance, creating room for loan fraud and default, the official said.
Regulators have informally asked some banks through window guidance to control their lending partnerships with fintech companies including Ant Financial, Caixin learned. The banks were told to control the size of joint lending, sources said.
Ant Financial holds an overwhelming dominance in the joint lending business with banks, and is involved in more thanhalf of the 2 trillion yuan loan market. With 870 million active users globally, including 450 million verified with their true identity, Ant Financial holds a web of users that is comparable to that of the world’s largest bank, Industrial and Commercial Bank of China Ltd.
According to a Zhejiang regulatory official, Ant Financial usually puts 10% to 20% of its own funds into loans. But as the business grows, its funding share has declined dramatically, indicating a shift to being a pure middleman. In some loan packages, Ant Financial provides only 1% of the funds, said the official. Ant Financial declined to comment on the matter but said it has reported all related business data to regulators.
In an interview with Caixin last week, Ant Financial Vice President Huang Hao described the company’s partnership with lenders as a joint credit business in which the fintech giant offers three types of services — providing client access, jointly financing loans and helping lenders to vet borrowers.
In partnership with smaller lenders, Ant Financial usually takes 25% to 50% of the profit generated depending on the services provided, an executive at a consumer finance company said.
A rural commercial bank official told Caixin that lenders and Ant Financial usually agree on a projected yield rate. In most cases, banks can earn 7% to 9%.
In the face of tightening signals from regulators, Ant Financial emphasized that it will focus on providing data and technology services. Wu Xiaoming, president of Ant Financial, called last month for tolerance by regulators for the joint lending business, saying it offers small banks advanced technology and customer access.
Ant Financial Chairman Eric Jing also said the business model meets the needs of a vast number of small businesses and individual borrowers in China. Jing called for regulatory bodies to issue clear standards and rules to regulate market growth.
People warning of the risks of the joint lending business see danger lying in the cracks in risk control.
A 2017 policy regulating the consumer loan business required banks to take full charge of risk control in partnership with internet platforms and barred platforms from providing guaranteed returns to banks.
But sources close to the matter told Caixin that fintech companies including Ant Financial and WeBank have all provided projected return rates to bank partners, a de facto guarantee. Ant Financial’s Huang denied any guaranteed returns.
A regulatory official said a guaranteed return would encourage banks to give up risk control and simply lend money to fintech partners.
An industry source said banks’ risk control engagement in the joint lending business can be judged through the rate of approvals for borrowers recommended by fintech platforms.
A medium-sized bank said fewer than 30% of customers introduced by Ant Financial qualified for loans from the bank. Another bank official said the rate at his bank was as high as 99%.
A rural commercial bank manager said that compared with fintech giants, smaller banks’ risk control systems are largely less effective.
Documents for investors showed that Ant Financial’s consumer lending businesses Huaibei and Jiebei both had nonperforming loan ratios of less than 1.2% as of the end of June, lower than the banking industry’s 1.8%.
But the regulatory official warned that smaller lenders should be more careful in relying on third parties for risk control as they are less resilient to risks.
An industry source said that although Ant Financial has strict risk controls, its bad loan ratio will rise as its credit business expands.
Some fintech and banking sources argued that the lending partnership will help small banks with limited customer access to gradually improve their own risk control capacity with technologies and data provided by their fintech partners.
But others argued that most internet companies don't offer clarity about the source, usage and efficiency of their data. It is unclear how much banks can benefit from those data.
“Fintech can’t improve borrowers’ repayment capacity or their moral level and credibility,” said Liu Chunxiao, deputy director of the Shanghai Finance Institute. “It is a huge risk to only rely on fintech to solve credit risks,” Liu wrote in an essay.
The joint lending partnership expands banks’ reach to borrowers and inevitably allows fintech companies to take part in lending decisions. It will also allow risks to spread across regions and institutions if any technology errors occur, said Liu Bo, chief executive of Dashu Financial Service Co. Ltd.
Contact reporter Han Wei (email@example.com)
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