Expanding Consumer Finance to Increase Spending Power

expanding consumer finance to increase spending power

24 june 2015

consumer finance companies offer faster approvals for a wider variety of goods than traditional bank loans link event

10 june: State Council session extends license approval for consumer financing companies from 16 pilot cities to the nation as a whole; approvals are devolved to provincial level

significance

● allows spending by lower income groups to increase share of consumption in economic growth

● encourages internet finance companies, foreign and domestic financial institutions and private capital to loan to lower income groups

intention

● increase availability and access to consumer loans to shore up spending on durable goods and services, like education and tourism

● differentiate consumer finance from orthodox banking. Consumer loan provision should be lighter and faster, requiring only proof of salary and an ID to take out an un-mortgaged loan

● allow consumer finance companies to compete on equal footing with commercial banks

● encourage capital from different sources, like private capital, domestic and foreign financial institutions, and internet firms to participate in consumer loan provision

● pool the advantages of new platforms and local partners in increasing potential borrower base and providing more accurate risk assessment. E-commerce opens new markets, big data enables better tracking of consumer preferences and credit history, and local capital is better equipped to assess local needs and risks

● standardise supervision to guard against usurious lending, and improve risk assessment

context

22 jul 2009: CBRC announced ‘Rules and management of consumer finance companies pilot’; four consumer finance companies launched in Beijing, Shanghai, Tianjin and Chengdu.

27 sep 2013: CBRC expanded the pilot program to ten more cities. Hong Kong and Macau-based financial institutions allowed to set up consumer finance companies in Guangdong and Shenzhen.

14 nov 2013: CBRC updated the ‘Rules and management of consumer finance companies pilot’, which

● allowed non-financial institutions to set up consumer finance companies

● lowered the threshold requirement for major shareholders from 50 to 30 percent

● strengthened the risk awareness of major shareholders

● allowed consumer finance companies to conduct business in other areas

● expanded the sources of funds by incorporating shareholders’ deposits

● adjusted prudential supervision requirements

10 June 2015 consumer finance licenses legalised nationwide. 2013 ‘Rules and management of consumer finance companies pilot’ still apply.

outlook

● steep regulatory capital requirements, at C¥300 million registered capital—three times that required for establishing an urban commercial bank—will delay the industry’s development. Currently only seven major companies exist after five years of pilots

● consumer finance companies cannot lend above C¥200,000, effectively barring their participation in large auto-loan and home mortgage markets

● inability to take deposits makes securing capital difficult. Commercial banks will continue to enjoy a stronger position because they have to pay less for their capital

● consumer finance company market share may increase with anticipated tightened P2P and internet finance regulations

● more comprehensive credit rating systems will decrease consumer finance company risks

● local partnerships will also help companies better filter potential borrowers

● standardised supervision will increase lower-income groups’ propensity to borrow, helping to end preference for cash-based transactions

● criteria to become a stake-holder in a consumer finance company are still high

roundtable don’t over-hype consumer finance companies

Ji Shaofeng 嵇少峰 | Sina Finance

Expanding and devolving license approvals, cautions Ji, does not spell overnight take-off for consumer finance companies. Consumer finance is already a well-developed market, dominated by a variety of players: state commercial banks, internet P2P platforms, pawnshops and small loan companies. Companies themselves are ill-equipped to compete with banks that can fund loans from deposits. Upper limits on loan amounts prevent them from accessing some 80 percent of the market, including home mortgages and auto loans. expanding consumer finance pilots aim to promote steady consumption growth

Zhao Ping 赵萍 | Shanghai DZH

Contrasting consumer finance companies with commercial banks, Zhao finds the former are well-poised to take over an under-developed credit market for low and medium income groups. Commercial banks’ consumer finance divisions are slow and lack versatility. Approvals take time, whereas consumer finance companies can offer loans with much less paperwork and in as little as half an hour. Banks are only really interested in providing loans for big ticket

items—autos and home loans—where finance companies can meet growing demand for a variety of durable goods and services. what is this consumer finance the government is pushing?

Dong Ximiao 董希淼 | Xinhua

Consumer finance is both the future driver of economic growth and on the cusp of financial innovation, assures Dong. In terms of financial services, consumer finance can take advantage of new platforms and changing consumption patterns to reach a much broader, untapped clientele. The market they cater to is still undersaturated, as current individual loan structures are meant to support mortgages, where the future consumer may simply be looking to space payment on an apple watch over a few installments. Citing foreign statistics on the rapid growth of the industry (20 percent annually, according to Boston Consulting Group), he implies that pessimists underestimate the potential scale of mass consumption to be unleashed through the internet.

Zhao Ping 赵萍 | MofCOM CAITEC Consumer Economics Department

Specialist on industrial circulation and international retail, deputy director Zhao Ping presents a clear theoretical account of how external conditions interact with domestic policy to shape consumer behaviour. Taking her current post on the eve of the financial crisis, she argued in 2008 that looser monetary policy should be used to increase wages to spur consumption, rather than investment. More recently, she questioned Wen Jiabao’s 温家宝 C¥4 trillion investment spree. MofCOM’s call for reducing import tariffs to boost consumption should have been heeded at the time, as it has now by MoF. Zhao has led a number of report teams on domestic market development strategy, including two for the 12th 5-year plan.

Ji Shaofeng 嵇少峰｜Nanjing Jindong Rural Micro-finance Company

Trained at China’s top accounting school, Nanjing Audit University, CEO Ji worked as a central banker and then regulator for 16 years before establishing his own financial guarantee company. Now running a small micro-finance company, Ji wields his on-the-ground perspective to level pointed criticism at P2P and micro-finance regulation. Adamant that commercial banks will not diversify to meet the needs of smaller corporate or individual borrowers, he calls for a policy bank or other dedicated top-down effort. He recommends P2P platforms cooperate with other small lenders to diversify risk; inadequacy of credit information still presents risks. Ji’s career path—regulator to private financier—is common, a revolving door that poses obvious moral hazard.

Dong Ximiao 董希淼 | Renmin University Chongyang Institute for Financial Studies

Retail banking expert, who entered academia after work as a financial planner and economist in major commercial banks. Dong frequently defends commercial banks, arguing they are unfairly scapegoated for NPLs caused by poor supervision. The public needs to accept a transition to more service fees—banks are, after all, private enterprises, and need to make a profit. He recently tangled with Ji Shaofeng 嵇少峰. Banks’ and P2P dynamism,

rather than unfair regulation, have allowed them to take market share from micro-financiers like Ji.

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