Fitch: China's non-bank consumer credit to return to growth in 2019

Fitch Ratings expects China’s non-bank consumer credit to return to growth this year after a sharp decline in 2018, as demand for online consumer loans remains strong and the government still aims for non-banks to support its efforts to promote inclusive finance to the under-banked population.

That said, the authorities are unlikely to roll back the steps taken to improve oversight and contain risks in the sector, which makes a strong rebound unlikely, the rating agency noted in its latest report.

China’s non-bank consumer loans doubled to stand at around 3 trillion yuan (US$440 billion) or 6 percent of the country’s total household debt, from the end of 2015 to the end of the first half of 2018, the report said. However, most of that growth came before authorities started to tighten the regulatory environment in late 2017.

China has intensified its crackdown on consumer credit in the "shadow banking" sector since December 2017, with stricter rules introduced on cash loans, such as a 36 percent ceiling for the annual percentage rate (APR).

The regulators also introduced higher capital requirements on micro-credit originators.

Under regulatory pressure, many irregular lenders have exited the market, while stronger players have adjusted to ensure compliance with new requirements and diversified away from the compliance-heavy cash loan business.

Ant Financial, a leading non-bank consumer lender and asset-backed security issuer, for example, has raised significant capital for its two micro-credit subsidiaries and scaled back its cash loan product, Jiebei.

An asset-backed security (ABS) is a financial security collateralized by a pool of assets such as loans, leases, credit card debt, royalties or receivables.

Due to the close scrutiny placed on web-based micro-lenders, China saw its peer-to-peer (P2P) lending fall particularly sharply last year, from a peak of 1 trillion yuan at the end of 2017 to around 750 billion yuan at the end of 2018.

Regulatory changes also led to a 30 percent drop in unsecured consumer credit ABS issuance, from 447 billion yuan across 162 deals in 2017 to 298 billion yuan across 113 transactions in 2018, the report showed.

However, Fitch believes that greater regulatory efforts will lead to healthier unsecured consumer lending over the long term and improve the quality of future ABS pools. Strict implementation of an APR cap of 36 percent for cash loans is likely to result in fewer high-risk borrowers originating.