Tighter Rules Set to Reshape China’s Consumer Lending Sector

China has implemented new and stricter rules for consumer finance companies, which appear aimed at limiting risks in the financial system.

The move on Monday by the National Financial Regulatory Administration (NFRA) looks likely to force consolidation in a sector that provides high-interest loans for millions of people shut out of traditional banking.

The measures are expected to push consumer finance firms to merger or seek other investors in a sector estimated to be worth about $120 billion.

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The tougher standards for the last line of credit for China’s riskiest borrowers are the latest steps aimed at containing financial risks in the world’s second-largest economy.

Exuberance in some sectors, especially property, witnessed in prior years is taking a major toll now on China’s household consumption, its middle-class wealth and confidence.

Half of 31 lenders lack required capital or backing

The rules, changed after a decade, require consumer lenders to have more than 1 billion yuan ($138.91 million) in registered capital – more than triple the previous minimum – and to secure a major investor holding a stake of at least 50% of its equity.

Checks by Reuters showed that of China’s 31 consumer lenders, 10 fall short of the capital requirement.

And roughly half of all the companies do not have a major investor that would qualify them under that standard, according to Han Kun Law Offices, which compiles an annual report on the sector for the China Banking Association (CBA).

China’s consumer finance companies provided the equivalent of $116 billion to more than 338 million borrowers, according to CBA’s report for 2023. The companies had $123 billion in combined assets at end-2022.

Many borrowers are migrant workers who have moved to China’s big cities, and blue-collar workers. Many are also younger than 35. They can struggle to provide proof of income and credit, shutting them out of bank loans when they need funds for travel, medical expenses, or the education of their children.

Interest rates on consumer loans are capped at 24% but some consumers have complained that hidden processing fees mean they have effectively paid more than anticipated. The amount of each loan is capped at 200,000 yuan ($27,781) by regulation.

Grace period expected while firms restructure

The incoming standards are expected to trigger a restructuring of consumer financial companies, eliminating less competitive players and attracting larger financial and internet firms into the sector, analysts said.

“The tougher rules will see a wave of existing consumer finance companies seeking new capital injections and expansions,” said one analyst at an industry association who asked not to be named because he was not authorised to speak to the media.

China’s largest consumer lender, Chongqing Ant Consumer Finance Co, owned by Alibaba affiliate Ant Group, has a registered capital of 23 billion yuan.

Analysts and finance executives expect a grace period of several months or even a year after the revised rules take effect next month as the NFRA readies the rules for implementation, analysts said.

In a question and answer statement published late on Monday, NFRA said that details on the timeline for firms to meet the new standards would be published later, without giving a specific timeframe.