CBIRC Loosens Consumer Finance Regulations, Reduces Provisions Coverage Ratio to 130%


China’s banking regulator has taken measures to loosen restrictions on the activities of consumer finance companies.

The China Banking and Insurance Regulatory Commission (CBIRC) recently issued the “Notice Concerning Driving Consumer Finance Companies and Vehicle Finance Companies to Strengthen Their Sustainable Development Capability and Raise the Quality and Efficiency of Financial Services” (中国银保监会办公厅关于促进消费金融公司和汽车金融公司增强可持续发展能力、提升金融服务质效的通知), which loosens a slew of prevailing regulatory restrictions.

The Notice allows consumer finance and vehicle finance companies to apply with the local offices of CBIRC to reduce their required provisions coverage ratio to 130%, while vehicle finance companies are also permitted to apply for their loan coverage ratio to be reduced to 1.5%.

The average provisions coverage ratio for the Chinese consumer finance sector is currently 186.34%, according to the “China Consumer Finance Company Development Report (2020)” (中国消费金融公司发展报告(2020)) released by the China Banking Association (CBA) in August.

Consumer finance companies will be allowed to reduce this ratio to 130% as long they categorise all loans in arrears for more than 60 days as non-performing, and their capital adequacy ratio is above the minimum regulatory requirement.

At present almost half of China’s consumer finance companies have reduced their non-performing loan standard from 90 days in arrears to 60 days.

The Notice also expands the funding channels for consumer finance and vehicle finance companies in China, allowing them to issue tier-2 capital bonds on the interbank market for capital supplementation purposes, and undertake regular loan asset ownership transfer operations with the Banking Sector Loan Asset Registration Circulation Centre (银行业信贷资产登记流转中心).

The “Consumer Finance Company Trial Administrative Measures” (消费金融公司试点管理办法) which came into effect in January 2014 stipulates that Chinese consumer finance companies are permitted to obtain financing via methods including:

  • Acceptance of deposits from the domestic subsidiaries of shareholders and domestic shareholders,
  • Borrowing from domestic financial institutions,
  • Issuance of financial bonds and domestic interbank borrowing, subject to approval from regulators.

Chinese consumer finance companies are also permitted to issue asset-backed securities (ABS) to raise funds, most of which are issued on the interbank bond market. CBA’s development report indicates that as of the end of February Chinese consumer finance companies had issued 24 ABS to raise 53.5 billion yuan.

Su Xiaorui (苏筱芮), senior researcher with the Madai Research Institute, said to National Business Daily that allowing consumer finance companies to reduce their provisions coverage will reduce their capital pressure, as well as enable them take more initiative in the categorisation of assets and thus increase their risk resistance capability.

Su also said that expanding the capital supplementation channels of consumer finance companies will further raise their ability to withstand risk.

The loosening of consumer finance restrictions by CBIRC arrived just as it released the draft version of the “Online Micro-loan Operations Provisional Administrative Measures” (网络小额贷款业务管理暂行办法(征求意见稿)) on 2 November.

The Measures outline a considerable tightening of online micro-loan operations in China, and is believed to be a key factor behind the suspension of the USD$36 billion Ant Group IPO in Shanghai and Hong Kong.

Analysts believe that the Measures will deter companies from using online micro-loan licenses to engage in consumer finance operations, and prompt them to instead obtain consumer finance licenses directly.

As of the end of June 2020 China was host to 26 consumer finance companies with total registered capital of 43.34 billion yuan.