Banking & Finance

The loan ranger

New entity Baihang to rate personal credit


Big Data and Big Brother

It’s easy to get a loan in China. Just not from a bricks-and-mortar bank.

In the last few years online credit companies have proliferated. Often all you need to qualify for a loan is a mobile phone and some kind of internet history. Applications take a matter of minutes and the money is usually dispatched instantly.

The service forms a vital part of the economy – allowing people to make consumer purchases, go on holiday or deal with unexpected expenses, such as sudden hospital bills. But the freewheeling nature of these lenders have some in government worried. Moreover, traditional banks also want in on the action.

Last month, after a crackdown on online lenders, the People’s Bank of China announced the formation of Baihang – a personal credit rating system similar to FICO in the US.

The new organisation will have eight shareholders: the National Internet Finance Association (NIFA), Alibaba’s Sesame Credit and Tencent Credit, as well as five other online credit assessment companies.

The goal is to pool information. In the past online credit firms have largely fallen into two groups: those that own large amounts of data themselves such as WeChat’s Weilidai or Alibaba’s Mybank, and those that buy data from these and other sources.

Unlike the US and the UK, there was no centralised system that aimed to gather credit information from multiple sources.

For major players such as Tencent and Alibaba this was a good thing. Their widely popular platforms – WeChat and Taobao – provided them with so much data about their customers they feel able to make good loans on the back of it.

Tencent’s Weidilai had on its books about Rmb360 billion ($57 billion) in outstanding loans at the time of its second anniversary last May, and the Alibaba-backed Qudian had lent about Rmb25 billion in the third quarter.

Other big shopping platforms also got in on the action – launched LexinFintech in 2013 and listed it on NASDAQ last December. However, it had to lower its IPO price after the government stepped up its crackdown on micro-lending. Qudian also saw its New York stock price crash 40% from its October IPO level.

Investors were rattled by a letter from the government-backed NIFA – the same one with a 36% stake in Baihang – warning “unqualified institutions” to stop offering loans.

The PBoC has since ordered its regional branches to stop lending to online lenders. At the end of December China had more than 8,000 micro-credit companies, which held Rmb980 billion in outstanding loans, the central bank said.

The lack of a centralised credit database has meant people have been able to take out multiple loans, sometimes using a new loan to pay off an old one. Though the Supreme Court ruled that no company could charge more than 36% in annual interest, many do.

Analysts predict many online lenders will close as the Baihang rating system starts to kick in. Banks, which have traditionally focused their lending on bigger companies and state-owned enterprises, should now find it easier to approve personal credit. In the past they didn’t have access to complete data that allowed them to make those decisions – only 410 million of the 899 million persons known to the central bank have any kind of basic credit history

At the same time online lenders that currently lend with minimal due diligence will probably have to close or buy information from Baihang, as standardised credit checks become the norm. “The creation of Baihang will help prevent fraud, the phenomenon of people taking multiple loans and the healthy development of the internet finance industry,” said.

Caijing, however, hinted at the next application of Baihang’s ratings – integrating them into China’s proposed social credit system, which will reward good citizens and penalises the untrustworthy, but is viewed by some as a bit Orwellian (see WiC352 for details). “After Baihang is launched honest borrowers will get more trust and support, while dishonest users will be barred from doing anything. Forming a good credit record is a good habit and an achievement worthy of everyone’s attention,” commented the business magazine.

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