China curbs online lending, forces tech firms to pay more

Chinese regulators issued new rules on online lending that will force Ant Group and other fintech companies to shoulder more responsibilities for every loan they issue. The aim is to limit excessive internet debt and lower financial risks for small banks. 

The online-lending boom in recent years has created a thriving consumer market and a few enormous companies to serve it: the financial technology behemoths like Alibaba-affiliate Ant Group, WeBank — an online lender backed by Tencent, JD Digits — ecommerce giant JD.com’s fintech unit — as well as New York–listed fintech giant Lufax. But the good times are over: The Chinese authorities pulled the $34 billion IPO of China’s largest online lender, Ant Group, last November, and have stepped up scrutiny of online financial services. 

Internet lending companies will need to fund at least 30% of every loan they issue jointly with commercial financial institutions, including banks and trust companies, according to a new policy issued by the China Banking and Insurance Regulatory Commission (in Chinese). 

• Ant Group funded as little as 2% of the total of $264 billion loans it issued by the end of June 2020, while asset-backed securities contributed 10%, and the rest lay on banks and trust companies, according to Wall Street Journal’s calculations based on Ant’s stock-filing documents.  
• The new policy, scheduled to be in effect on January 1, 2022, will require Ant Group and other online lenders to fund $30 of every $100 they lend. 

Banks also face caps on how much they can lend when partnering with fintech companies, and are banned from lending to anyone who lives outside of their home jurisdictions through internet loans.

• Local and small banks funded the bulk of online lending and relied on the consumer credit data provided by technology companies like Ant Group. This allowed them to expand their lending business but also introduced risk to their already shaky financial ground. 
• Regulators will now require banks to limit their co-lending with any internet platforms to 25% of their primary funding source, and expect banks to diversify their online-lending partner portfolio so as not to be dependent on one fintech company. 
• Banks will also need to ensure that online loans never exceed 50% of their outstanding loans. 

Fintech companies are already reacting to the new reality:  

• Ant Group has reduced its loan amounts and cut credit limits for certain borrowers, and is reconstructing itself into a financial holding company overseen by China’s central bank. 
• New York–listed Lufax said on Monday that it already began to bear more of the risk of its online loans, and added that the new rules will not impact its business, since the company primarily serves small-business owners. 
• JD Digits, originally named JD Financial and rebranded as JD Tech last month, integrated JD’s Cloud and artificial intelligence businesses and diverted itself to a technology-focused product portfolio to avoid the tough regulatory environment in the  online finance industry.