Deleveraging Campaign Puts Kibosh on Consumer Loan Securitisation Binge


China’s ongoing deleveraging campaign is expected to cool the boom in consumer loan securitisation by online micro-lenders and large-scale Fintech concerns.

Consumer loan securitisation has emerged as a boom market in China, with micro-lenders raising billions of dollars in funds by flogging asset-backed securities to institutional investors eager to expand their balance sheets.

The practice of asset-back securitisation enables the original lenders to rapidly shift their loans off balance sheet by selling off the products, which in turn permits them to dodge official limits on debt-capital ratios.

The scale of consumer-loan backed securities has skyrocketed by more than 35-fold in just the past two years, as China’s rapidly expanding middle-class pursues consumption beyond its immediate means.

According to data from China Securitisation Analytics 489.4 billion yuan in the securities were issued in 2017, as compared to 98.9 billion yuan in 2016.

Some of China’s biggest tech companies have expanded into the sector, including Alibaba’s Ant Financial Services, which currently has a 60% market share, as well as the financing vehicles of, Baidu, VIPShop Holdings and Xiaomi Technology.

Commercial banks are also making forays into the sector, with Bank of Jiangsu teaming up with Debang Securities to launch the first investment fund focused on loan-backed securities in March with 20 billion yuan in capital.

Industry sources tell Reuters, however, that the growth of the sector is set to slow in 2018, as regulators crack down on the high leverage levels of lenders and adequate asset disclosure.

Guo Yonggang, general manger of Golden Credit Rating International’s structured financing department, said that China’s National Association of Financial Market Institutional Investors (NAFMII) as well as the country’s exchanges are no longer issuing consumer loan-backed securities that are issued by online micro-lenders.

The move comes after regulators introduced regulations on 1 December that restrict the volume of lending that companies can make via the products, as well as mandate their consolidation on balance sheets.

The new regulations have already prompted Ant Financial to shelve plans to issue billions of dollars in asset-backed securities, according to sources speaking to Reuters.

Officials from the Chinese central bank reportedly expressed their concerns about the high debt levels of Ant’s consumer finance business, and mooted the possibility of preventing the company from issuing new securities until it dialled down its leverage.

NAFMII is also seeking to increase the transparency for consumer loan securities by raising its disclosure requirements.

Analysts have raised concerns about the risk-assessment of consumer loan securities given brief period history of micro-loan companies and asset-backed securitisation in China.

They also note that efforts to rein in the consumer loan-backed securities market will prove a challenge given that many transactions are conducted via local financial exchanges and equity trading centres or online financial platforms, making them a challenge for regulators to monitor.