CBIRC, PBoC Solicit Opinions for Online Microlending Administration Measures

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CBIRC, PBoC Solicit Opinions for Online Microlending Administration Measures

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CBIRC and PBoC issued draft interim measures for internet micro loan businesses on November 2 and will be soliciting public opinions for one month, according to the Chinese government’s official website on the following day. The measures specified that online microlending companies shall hold a license from provincial administration departments and can only carry out businesses within the provincial areas of their registration. If a company intends to conduct cross-regional operations, it must receive a permit from State Council’s banking regulators. Moreover, such firms must have a one-time paid-in registered capital of a minimum of RMB1bn, with RMB5bn as the bottom line for those cross-regional ones. In addition to an increase in corporate entrance thresholds, the draft also clarified that online micro loan companies must contribute to at least 30% of each single loan that they release in collaboration with banks.

The administration’s measures on online micro loan companies is a part of the financial regulatory system determined by the National Financial Work Conference (NFWC) in 2017, where CBIRC took charge of stipulating regulation for seven types of financial institutions. Prior to this, CBIRC distributed interim measures for the administration of internet loans of commercial banks on July 12, 2020, to enhance online microlending policy from the banking side. By issuing an additional set of draft measures this time, Chinese financial regulators are signaling a further tightening on internet microlending businesses.

Currently, different from banks, micro loan companies do not have leverage ratio limits, which, through joint loans with banks, push up leverage ratios for the overall financial system, creating opportunities systemic risk. For instance, the leverage ratio of Alibaba [BABA:US]-backed Ant Group is estimated to be at around 50-60 times, which contributes to the high profit of the group. Therefore, with requirements such as paid-in capital and money contribution proportions, online micro loan companies will have to limit their leverage ratios at up to 16 times, slightly higher than the 13 times of consumer finance firms. Such regulatory pressure is designed to improve financial system stability. These major changes in the legal and regulatory environment will wipe out most internet micro lenders and result in profit decreases of large-scale players including Ant Group. This has also been the main reason for Ant Group’s dual listing plan suspension. To comply with the new rules and stay operative in this sector, online micro loan firms need to improve their risk management and show they will not negatively affect financial system stability.