Crackdown looms for China’s online loan sharks

Online loan sharks are coming under heavy scrutiny in China, with reports that many are charging interest rates of up to 1,000% and less than a quarter comply with licensing requirements.

Bloomberg reported last week that Chinese regulators are mulling a crackdown on online micro-lenders, due to concerns about a surge in consumer borrowing and the charging of exorbitant interest rates.

The rumors appeared to have an adverse impact upon the New York-listing of Chinese Fintech player PPDAI Group, which initially marketed its 17 million US depository shares at US$16 to $19, yet eventually decided to sell them for $13 apiece.

Chinese media is stepping up its scrutiny of corrupt activities in the micro-lending sector, with Changjiang Times just reporting that local online micro-lenders are charging consumer borrowers interest rates of up to 1000%.

Micro-lending in China typically refers to cash loans of up to 3,000 yuan (US$452) that are obtained via online platforms. These facilitate real-time approval and rapid remittance to borrowers’ accounts.

Multiple industry sources told Changjiang Times that the interest rate charged for cash loans by online micro-lenders is usually 50% to 60%, but they said in some cases it can rise to 500% to 600% or even 1,000%.

Such exorbitant rates often leave unsuspecting borrowers in dire straits – especially university students and other individuals with no fixed-income, as the penchant for consumption intensifies among China’s rapidly expanding middle-class.

This was the case for one female high-school student in central China, whom Changjiang Times said used online micro-lending apps to rack up around 50,000 yuan in debt within the space of a year.

While the student only borrowed 20,000 to 30,000 yuan initially, the exorbitant interest charges and fines for late-payment rapidly took her total debt level to over 50,000 yuan, as she rolled over loans via a succession of micro-lending apps.

Another case reported by Chinese domestic media involved a 23-year-old female student, who accumulated debts of around 190,000 yuan (US$28,572) to online lenders after taking out a loan to buy a cat.

Online lenders reportedly target poor people who have difficulty obtaining consumer financing by conventional means.

Figures cited by Changjiang Times indicate that up to 30% of Chinese are credit cardholders, while a further 60% can get access to various types of informal finance to obtain funds.

Online micro-lenders focus their efforts on the remaining 10% of people who do not have access to conventional or informal lending, such as students, rural migrants and blue-collar workers.

This untapped demographic has proved to be a robust source of repeat demand for online lenders.

Data from 100credit.com’s “2017 Cash Loan Industry Analysis Report” found that over half – 56% – of micro-loan customers had sought credit from micro-lending platforms on more than two occasions.

A third (36%) had applied for micro-loans on two to five occasions, while half (49%) of repeat borrowers had sought loans from multiple platforms. Only 7% made multiple applications with a single lender.

China’s leading online players are reaping huge benefits from this demand, with A-share company Shanghai 2345 Network enjoying a net profit from its fintech operations of 238 million yuan in the first half of 2017 – a staggering 4,469% increase over the same period last year.

The rich rewards on offer in online micro-lending in China have also spurred a huge number of unlicensed platforms to enter the sector.

One industry expert told Changjiang Times there are at least 1,000 online loan sharks operating in the country, including P2P lenders, vertical lending platforms, consumer finance companies and third-party payment vehicles.

However, at the end of September this year, the government had only issued 237 online micro-loan licenses – less than a quarter of the estimated number of credit providers.