China’s consumer debt crackdown hits cash loan providers

China’s boom in micro-lending comes as lenders seek to cash in on rising incomes in a country where credit card penetration remains at about one-third of the population. (Reuters)
Updated 02 December 2017

China’s consumer debt crackdown hits cash loan providers

BEIJING: Executives from Chinese companies specializing in offering consumers small, easy-to-get loans became something of a fixture on Wall Street this year.
Led by companies such as Qudian and PPDAI Group, the Chinese micro-lenders raised $1.2 billion (SR4.5 billion) with splashy US listings, cashing in on a boom in borrowing by consumers in China with little access to traditional banks.
However, the fortunes – and share prices – of the micro-lenders have slumped in the past week as Beijing clamped down on risks in the financial system, zeroing in on the fast-growing and loosely-regulated market for unsecured “cash loans.”
On Friday, China’s financial regulators introduced new measures aimed at restricting the industry, which is estimated to be worth 1 trillion yuan (SR570 billion).
China has long been known as a nation of savers, but consumers are rapidly embracing debt from non-bank online platforms. The number borrowers taking out cash loans from the micro-lenders is growing at an unprecedented rate, according to the lending companies and the government.
For borrowers, the easy loans can be a risky proposition – especially if they fall behind on payments. The loans are usually in the range of 1,000 yuan; interest is typically about 36 percent annually, and penalty charges and compound interest can quickly add up, according to borrowers.
The number of repeat borrowers is rising, which could signal financial stress on borrowers, analysts say. The companies, however, say the repeat lending is just a sign of the attractiveness of their platforms.
The People’s Bank of China and the China Banking Regulatory Commission did not respond to faxed requests for comment.
Angel Xiao, 23, who lives in the southern boomtown of Shenzhen and does not own a credit card, said she borrowed 10,000 yuan last year from two online lenders, PPDAI and Flower Wallet, to attend a jewelry design class.
But after she lost her job as a tutor, she found herself unable to pay back the initial loans. With interest piling up, Xiao eventually took out a series of new loans, with an average maturity of 14 days, from more than 30 other lenders.
“I didn’t have money to repay loans coming due,” she said in an exchange on WeChat, a messaging service. “So I took out more loans. Every time when I didn’t have money, I used new loans to repay old loans. That’s how I got trapped deeper and deeper.”
China Rapid Finance, an online micro-lender that raised $60 million in an April listing on the New York Stock Exchange, defended its cash loan business.
In a statement, it said that its target customers have little or no history with China’s credit bureau, but that they “are prime and near-prime borrowers,” and that it only grants new loans to borrowers who have repaid in full all prior loans granted by the company. It also said the rates it charges are affordable.
In its third-quarter earnings report, China Rapid Finance’s repeat borrower rate was 75 percent.
Online consumer lending in China, of which cash loans are a significant portion, dwarfs similar activity in the rest of the world combined, accounting for over 85 percent of all such activity globally last year, according to a recent report by the Cambridge Center for Alternative Finance.
The boom in micro-lending comes as lenders seek to cash in on rising incomes in a country where credit card penetration remains at about one-third of the population, according to data from the central bank, which says about half a billion consumers don’t have a credit score.
And the online cash loan sector is projected to reach 2.3 trillion yuan by 2020, according to the research firm iResearch.
China Rapid Finance in November reported a 514 percent year-on-year increase in short-term consumer lending in the third quarter to $908 million. PPDAI’S “handy cash loans,” with maturities of one to six weeks, increased more than 10 fold year-on-year to 1.98 billion yuan in the second quarter, it said. Qudian recorded a 695 percent increase in net income for the first six months this year, it said in its listing prospectus.
Qudian and PPDAI declined to comment.


Easy credit poses tough challenge for Russian economy minister

Updated 18 August 2019

Easy credit poses tough challenge for Russian economy minister

  • Measures being prepared to help indebted citizens; situation might blow up in 2021

MOSCOW: New machines popping up in Russian shopping centers seem innocuous enough — users insert their passport and receive a small loan in a matter of minutes.

But the devices, which dispense credit in Saint Petersburg malls at a sky-high annual rate of 365 percent, are another sign of a credit boom that has authorities worried.

Russians, who have seen their purchasing power decline in recent years, are borrowing more and more to buy goods or simply to make ends meet.

The level of loans has grown so much in the last 18 months that the economy minister warned it could contribute to another recession.

But it’s a sensitive topic. Limiting credit would deprive households of financing that is sometimes vital, and could hobble already stagnant growth.

The Russian economy was badly hit in 2014 by falling oil prices and Western sanctions over Moscow’s role in Ukraine, and it has yet to fully recover.

“Tightening lending conditions could immediately damage growth,” Natalia Orlova, chief economist at Alfa Bank, told AFP.

“Continuing retail loan growth is currently the main supporting factor,” she noted.

But “the situation could blow up in 2021,” Economy Minister Maxim Oreshkin warned in a recent interview with the Ekho Moskvy radio station.

He said measures were being prepared to help indebted Russians.

According to Oreshkin, consumer credit’s share of household debt increased by 25 percent last year and now represents 1.8 trillion rubles, around $27.5 billion.

For a third of indebted households, he said, credit reimbursement eats up 60 percent of their monthly income, pushing many to take out new loans to repay old ones.

Orlova said other countries in the region, for example in Eastern Europe, had even higher levels of overall consumer debt as a percentage of national output or GDP.

But Russian debt is “not spread equally, it is mainly held by lower income classes,” which are less likely to repay, she said.

The situation has led to friction between the government and the central bank, with ministers like Oreshkin criticizing it for not doing enough to restrict loans.

Meanwhile, economic growth slowed sharply early this year following recoveries in 2017 and 2018, with an increase of just 0.7 percent in the first half of 2019 from the same period a year earlier.

That was far from the 4.0 percent annual target set by President Vladimir Putin — a difficult objective while the country is subject to Western sanctions.

With 19 million people living below the poverty line, Russia is in dire need of development.

“The problem is that people don’t have money,” Andrei Kolesnikov of the Carnegie Center in Moscow wrote recently.

“This is why we can physically feel the trepidation of the financial and economic authorities,” he added. Kolesnikov described the government’s economic policy as something that “essentially boils down to collecting additional cash from the population and spending it on goals indicated by the state.”

At the beginning of his fourth presidential term in 2018, Putin unveiled ambitious “national projects.”

The cost of those projects — which fall into 12 categories that range from health to infrastructure — is estimated at $400 billion by 2024, of which $115 billion is to come from private investment.