Consumer Finance Boom Results in Burgeoning Bad Debt

23

A boom in China’s consumer finance sector has been accompanied by the steady climb of its bad debt levels.

More and more lenders are vying for the enticing profits offered by China’s consumer finance sector, as Chinese citizens increasingly eschew thrift to spend on credit.

China welcomed its 20th consumer finance company earlier this month, following the launch of a 600-million yuan joint-venture by Bank of Jiangsu, KGI Bank, Heilan Home Co. Ltd. and Shanghai 2345 Networking Hold Group on 12 April.

Consumer finance companies can reap impressive profits by levying high interest rates on the risky lending that commercial banks cannot undertake due to regulatory constraints.

In China this heightened risk has been accompanied by a steady rise in the sector’s bad loans over the past several years. Consumer finance companies posted a bad loans rate of 4.11% in the third quarter of last year, as compared to 2.85% in 2015 and 1.56% in 2014.

The bad loans rate of the consumer finance sector stands in sharp contrast to the NPL rate of China’s big five lenders, which currently stands at less than 1%.

The heightened risk which is intrinsic to consumer financing has been further compounded in China by the sector’s relative immaturity.

Consumer finance companies only made their debut in China at the start of the decade, and the country’s lenders still lack a developed system for recording the personal credit histories of borrowers.

Lending decisions are still primarily based on the income, collateral and existing liabilities of applicants.

Analysts further point out that the sector remains poorly regulated, with many consumer finance companies operating without licenses and engaging in highly unethical business practices.

A recent university lending scandal saw consumer finance companies demand nude photos from students as collateral, and then release these photos following failure to make payments.

LEAVE A REPLY

Please enter your comment!
Please enter your name here