Writer: Zhang Yuxin
Cash loan, similar to payday loan, has become China’s latest billionaire breeding ground, enabling a slew of otherwise failing internet finance firms to turn things around, become profitable and even go public, but will regulation and overlapping loans cast a shadow over the sector’s future, sparking a domino effect that eventually causes the market to collapse?
This article offers an in-depth analysis of China’s cash loan fever in six parts. You’ll be able to learn about the past and present of the cash loan business in China as well as get a glimpse into its uncertain future.
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Part 1. Billionaire breeding ground
On October 18, 2017, Luo Min, the founder of Qudian, rang the NASDAQ bell in celebration of the company’s IPO as its market value soared passed $10 billion. No one can imagine that the company was still busy trying to keep things afloat 15 months ago.
Luo was known for his knack for speaking publicly and stirring up audience’s emotions, but at a news briefing on July 7, 2016, he was apparently seized by panic and could not even pull his words together, nothing you would expect from someone whose company had just got capital injection.
That morning, Beijing’s regulator had summoned him for a talk and ordered him to shut down his company’s student loan business.
Qudian was Luo’s tenth attempt at entrepreneurship and student loans were its main business. The regulator’s words were like a death sentence to him.
However, no one expects that, in a few months, Luo is standing in the spotlight at the New York Stock Exchange, his company already valued over $10 billion.
The 15 months witnessed the collapse of the entire sector and transformation of the company. In the end, it was cash loan that came to its rescue. Despite a loss of 233 million yuan the year before last, the company already netted 577 million yuan last year and saw the number surge by 600% year on year to 974 million yuan in the first half of this year alone.
PPDAI, another loan service provider, also managed to turn the tables during that period and brought its half-year net profit to 1 billion yuan, 25 times that of the first half last year.
Few businesses are quite like cash loan, which, with a rather simple business model, is able to generate staggering profits in an extremely short period of time.
As a result, cash loan has bred faster than rabbits among unheard-of startups, struggling P2P lending firms, conventional consumer finance providers and internet firms, bringing huge profits to the market.
Meanwhile, cash loan has increasingly become an under-the-table business. It’s common knowledge for cash loan providers that you need to keep a low profile to build up your fortune in this field. “I have to keep it a secret despite having made huge money,“ the owner of a cash loan firm said, apparently a little upset. “Artificial intelligence” and “smart finance” have been used as alternatives by people in the sector when they have to talk about their business.
A number of internet finance companies have gone public secretly over the past one or two months. Some did not even host press conferences or interviews. As for PPDAI, its listing date was set on the Singles’ Day. The news about its IPO went largely unnoticed as the e-commerce shopping frenzy swept the country.
No one knows how long the cash loan fever can last, but half a year later, regulation is again clouding the market.
What a financial advisor said privately may be telling. He has chosen not to set foot in the area because he is sure that the cash loan bubble would eventually explode, just like what happened in the U.S. market.
Part 2. An addictive business
The high profit margin on cash credit products saved many previously unknown or even dying internet firms. A huge, yet unpredictable market has been created.
Speculators swarmed in. Some leading players are lending up to 5 billion yuan a month. The market is also crowded with numerous small lending lenders. “There are over 10,000 lenders in the market in total if small and obscure platforms are counted in,” an industry insider told Kr-Asia. “People are rushing into the cash loan business, even though they have no financial backgrounds. They have absolutely no respect (for the industry’s standards and rules). For many small lenders, risk management is not even an issue. With interest rates so high, they can easily make money as long as the bad debt ratio isn’t going too far.”
Cash loan became a hotspot for entrepreneurs for its steep interest rates, which, to be fair, are not completely unreasonable. In addition to a large amount of working capital to sustain themselves, cash loan companies must invest heavily to acquire customers and cover bad debts. High interest rates can help them cover the high operating costs. However, as said by the CEO of a cash loan company, “while it’s reasonable to set the annual interest rate at or comparatively higher than 100%,” many small lenders “charge as high as 700% or 800%.” That explains why they are able to make decent profits even though their monthly lending volume is less than 100 million yuan.
These small platforms should be blamed for the “original sin” of the cash loan industry. They set shockingly high interest rates and care little about branding or industry rules. Turning quick profits is their sole target.
This does not only happen in China. According to Pew, the annual interest rates of payday loans in the U.S. generally fall between 390% and 780% and, in extreme cases, could reach 1000%.
This April, Chinese regulators placed a 36% cap on the interest rates of cash loan products. Many lenders have since lowered their interest rates, some to a level similar to those of credit cards.
However, they have instead begun to charge all kinds of service fees, such as approval fees, platform management fees, risk management fees, approval channel fees and information verification fees, which may combine to take up over 80% of the fee collected for each loan in total.
Many platforms also deduct prepaid interests, usually over 10% of the loan amount. That means you will only get 900 yuan if you borrow 1,000 yuan.
Besides the high interest rates, a largely neglected revenue source for cash loan platforms is the high penalties for late payment. Qudian was once reported to collect an awfully high overdue penalty – 1% of the overdue amount per day. That means it takes only 100 days for the cumulative penalty to grow to the size of the loan itself.
“Any loan business can make exorbitant profits as there are so many ways to charge a fee. It’s simply a matter of how far you are willing to go for the profit,” a unicorn company in the internet finance sector said to Kr-Asia.
As entrepreneurs flock to offer cash loan for the prospect of making big money quickly, those on the borrowing end are becoming obsessed as well.
“I have borrowed from a dozen platforms, first from Baitiao.com and Alipay to buy a phone and notebook. When I found myself unable to repay the loans, I turned to WeBank, Qihoo 360 and Laifenqi (operated by Qudian) and was later suggested to borrow from lenders that charge even higher interest rates,” Liu Xin, who is just a year out of college, said in an interview with Kr-Asia. “My debt eventually snowballed to between 40,000 and 50,000 yuan.”
There is such huge demand for loan services that traditional financial institutions can’t satisfy, especially among students and blue-collar workers, who have little or no credit history. On the one hand, the cash-loan business has turned many entrepreneurs into billionaires overnight; on the other, large numbers of borrowers are finding themselves mired in debt. Criticism has emerged as a result.
Liu Xin is certainly not alone. Many young people had similar experiences. What started as reasonable demand for a little extra money, for example, to buy a longed-for item or to cope with an emergency, eventually evolved into a debt snowball, forcing them to keep borrowing to pay back.
“Borrowing can be addictive,” the CEO of a leading cash loan provider once said to Kr-Asia. For some people, finding new platforms to borrow is as addictive as heroin. “It’s like completing missions in video games. It brings you a sense of achievement.”
For many blue-collar workers who are frequenters of cash loan platforms, the game will continue as long as there is still a platform that accepts them.
“Young blue-collar workers have no spending plan whatsoever. They frequently give in to impulse buying. Some even spend all their monthly income within the first week of payday,” said Wang Feng, who works for a first-tier VC firm and went on a research trip this year to Jiangsu and Zhejiang, where he interviewed many blue-collar borrowers at local factories. “Almost all of them have five to six cash loan apps on their phones. Some even have an entire screen of such apps.”
When people are unable to repay existing loans, they borrow from new lenders. For some borrowers, this has become part of their lives. However, once the chain breaks, the domino effect that follows is set to send the market into a downward spiral. What is the likelihood of there being a massive breakdown? And how long does the sector have before that day comes?
Part 3. Pervasive overlapping loans and go-betweens cashing in on the fever
“I’m screwing up. There are no new platforms I can borrow from.”
“I have three or four loans that are about to mature and have been bombarded by calls from debt collectors lately. I tried the platforms I know again and got rejected by all except Sina Loans and WeBank.”
Liang Lu receives somewhere around 100 such clients each day in his office and his job is to help them find new lending platforms. His company charges a service fee for each loan it facilitates. If that sounds familiar, it should, because it’s exactly what traditional loan brokers do. The burgeoning lending industry, from student loans and online credit to today’s cash loan, has fed the pockets of many loan brokers.
“Clients who come to us have all borrowed from multiple, usually seven or eight platforms already. They don’t know which else lenders they could turn to, but we do. We know which platforms have relatively loose approval requirements.” Liang holds information on hundreds of cash loan platforms, which are categorized by how strict their loan eligibility standards are.
Helping clients borrow money does not require a complicated process.
Liang would ask if the clients have credit cards and whether they are covered by the housing provident fund or social security scheme so that he can refer them to lending platforms accordingly. “Some platforms include the holding of credit cards or social security cards in their eligibility criteria, but some lend to students, people with bad credit and even ‘three-nos’ (no houses, no cars and no savings),”said Liang. “The first step of our work is drawing up a list of platforms whose eligibility criteria our clients can meet.”
After crossing out those the clients have already borrowed from, Liang and his team would start trying the rest one by one. “We start from platforms that charge lower interest rates,” said Liang. The last options are small and short-term loans with high interest rates.
Brokers seldom bother to polish clients’ profiles. “It’s of little point,” Liang noted. For them, it’s just a matter of probability.
It’s always easier to borrow from platforms that collect high interests, but the thing is, many of those who turn to brokers already have to pay high interests on their existing loans. “Most of them were already customers of lending platforms that charge a monthly interest rate of 20% or higher,” Liang noted as he recalled the cases he had dealt with. What struck him as a little surprising is clients’ acceptability of high interest rates. “Even loans with a monthly interest rate of 30% have a market. That’s an annual interest rate of 1500%!”
When a borrower defaults on his loan, his or her name will appear on the credit blacklists managed by third-party risk management companies like Tongdun Technology and will never be able to borrow again.
Once a loan is granted, brokers can charge clients for their services, which are usually priced between 10% and 20% of the loan amount. If the client is directed from another broker, the fee will be split fifty-fifty. That means if you borrow 2,000 yuan from a lending platform through a broker and the platform happens to charge prepaid interests, you will probably get 1,500 yuan in the end.
“Our company’s monthly profit is a seven-digit figure,” Liang made no bones about the high return of his business. “We are profiting from the information asymmetry between borrowers and lenders.” As he sees it, “loan brokerage is a one-way bet that carries no risks.”
That being said, Liang admitted that as the average number of loans per borrower rose, his company was starting to feel the impact too. “If a client has borrowed from more than 15 platforms, it may take one and a half month at most before things fall apart.” After that, the client will never be able to borrow from a new cash loan company again. Even if he or she can, the amount granted will be increasingly less, making it impossible for him or her to fill the big hole.
That prompted Liang to come up with a solution known as the third-party repayment service. It’s expected to postpone the “fall apart” date for individual borrowers as well as for the entire industry.
The service is directed at clients for whom it’s impossible to borrow again. Liang’s company offers to repay certain amount of their existing loans so that they can apply for new loans.
The service will cost another 10% of the amount to be borrowed. “If a client wants to borrow 5,000 yuan from a new platform, we will first help repay part of his or her existing debt. When he or she is granted the new loan, apart from deducting the money used to repay old loans, we will charge an additional 500 yuan as service fees.”
This made his business even more profitable.
“In the past, we had to keep looking for new lending platforms. Now we can just repay clients’ loans for them and they can borrow new money right away. It’s even easier for us this way.” Liang has been recruiting agents nationwide in an attempt to expand his new business lately.
For cash loan providers, loan brokers bring more good than harm for the time being. “As long as people keep borrowing, we lending platforms will be able to make money,” someone engaged in the cash loan industry said. For him, it doesn’t matter if clients are borrowing from new platforms to repay existing loans, as long as it’s not his platform that has to suffer the consequences of customers defaulting on payments in the end.
Part 4. Traffic – the lifeblood of cash loan platforms
Cash loan providers are as eager to find customers as customers are to borrow money.
Customer acquisition, risk management and working capital constitute the three biggest costs for a cash loan platform, among which customer acquisition takes up the largest share. Traffic has become the lifeline for the cash loan industry.
“The customer acquisition cost for cash loan has skyrocketed to 200 yuan or higher per borrower, more than five times as high as the level last year,” someone who works in the cash loan industry told Kr-Asia.
That means the profit a platform earns from a customer’s initial loan may be insufficient to cover even the money it has spent to acquire the customer. That makes repeat borrowing a key to profitability. “The average repeat purchase rate of cash loan platforms is pretty high, exceeding 60%,” the above VC firm investor Wang Feng told Kr-Asia.
Cheap and high-quality traffic is what’s behind Qudian’s staggeringly high return. Seen from its prospectus, Qudian used Alipay’s consumer interface free of charge before March 2017. Apart from Alipay, Qudian is investing in other customer acquisition channels too. Based on an industry insider’s estimate, the average customer acquisition cost for Qudian is probably less than 30 yuan per borrower, way lower than the industry average.
This has encouraged many other platforms that are drawing massive traffic as Alipay is to diversify into the cash-loan business. Ready-made traffic sources give them a notable advantage over startups.
Shanghai 2345 Network Holding Group, which operates the web directory 2345.com, made a fortune after diversifying into the cash loan sector.
Having amassed large numbers of borrowers with a link on 2345.com to loan services, the company rolled out its own cash loan product – 2345 Daikuanwang (literally 2345 Credit King) – and saw its Q3 revenue reach 1.965 billion yuan this year. Cash loan contributed to much of the 712 million income attributable to shareholders.
Besides web directory services, news portals, mobile security assistants, social media platforms, live streaming websites and gaming platforms have an unparalleled advantage in attracting user traffic too, and many of them, big or small, have been attracted by the huge profits of the cash loan business.
On the other hand, cash loan providers without ready-made traffic sources have to pay to have traffic steered to their platforms.
“There are hundreds of online and offline customer acquisition channels, including, among others, WeChat groups, QQ groups, credit card communities, part-time job websites, news aggregators, Tencent Social Ads and Android app stores, and we are using almost all of them,” the CEO of a cash loan provider told Kr-Asia. Among them, loan “supermarkets” have become one of the most important sources of traffic for lending platforms.
Rong360, which has offered services that help connect financial products with potential customers for nearly six years, has seen its business grow significantly this year thanks to the rise of cash loan. According to its prospectus, the company’s revenue growth for the first half of 2017 reached 170% while income from loan recommendation services arrived at up to 240%. In a sense, loan “supermarkets” became popular because many users don’t like having too many lending apps on their phones.
Unsurprisingly, the traffic steering business is also dominated by companies already drawing large amounts of traffic. For example, the office software provider WPS, which has 600 million users, and the download manager Xunlei, with a user base of 400 million, have both launched their own loan “supermarkets” in hopes of generating additional value from their large user bases.
In the meantime, cash loan providers themselves are making money from traffic direction services by referring customers who fail to meet their eligibility standards to other lenders It’s called “throwing a bill” in the industry.
Moreover, as the growth in conversion rates slowed, some leading cash loan providers have gradually shifted their focus from performance-based advertising to brand-based advertising, which enhances the brand awareness and recognition of a company over time.
The field they turned to, as a result, is video streaming websites.
“Many cash loan companies have come to us for advertising deals lately,” Zhou Fan, who works for a first-tier video streaming website, told Kr-Asia. “Our services are not cheap. Mid-roll ads in a popular drama that attracts 10 million views per episode cost at least 3 million yuan, with discounts offered only for package deals.”
Zhou’s company has recently received a big order. “The client spent 130 million yuan in the first half alone. You can find its ads in several hit series.” Zhou said the client is also looking to go public.
The fact that cash loan providers are willing to splash out on advertising is another demonstration of the high returns of the cash loan industry. “Some big companies didn’t even ask for figures on the effects of our ads as long as the dramas attract large numbers of viewers. They don’t bother to read the statistics.”
Cash loan companies have left no stones unturned when it comes to customer acquisition channels. Against such a background, the cost of customer acquisition is expected to rise further and the profit margins for cash loan platforms are set to shrink amid rising cost and falling interest rates (as a result of tightening regulation).
Part 5. Unraveling the mystery behind the cash loan providers’ risk management approaches
Cash loan providers’ approaches towards risk management have long been cloaked in such fancy notions as “artificial intelligence”, “smart finance” and more. They sound novel, but they don’t help at all to clear the mist around their risk management approaches.
“To identify and minimize the risks, we ask the borrowers to register with their real identity and link their accounts to their bank cards, preferably their credit cards, and we also crawl their contacts and call logs. Then, we identify if a borrower is on the credit blacklist according to the data obtained from risk management services providers,” an employee from a cash loan company told Kr-Asia.
Basically, this is how most small-scale cash loan providers approach risk management. Some cash loan providers are even more reckless – “Borrowers can get loans as long as they are not on risk management services providers’ blacklists and the personal information filled is authentic,” Xu Qing, Commercial Representative from a finance software company which provides risk management solutions to a number of cash loan providers, told Kr-Asia.
Information and data collected from borrowers by micro-lenders is largely used to identify frauds, which they can’t afford to turn a blind eye to.
That includes checking if a borrower has any loans overdue and overlapping loans.
Late repayment is a line that the borrowers should never cross. Otherwise, the risk management services providers will see to it that the borrower makes it on the credit blacklist. The consequence is obvious. No loan will ever be provided to him or her.
A cash loan company can determine the risk level of a borrower by digging into his or her overlapping loans. The more overlapping loans a borrower has, the lower the borrower’s credit rating is and the less credit limit is offered.
This is a vicious cycle for both the borrowers and the cash loan providers. It only gets worse as time progresses. In the U.S., the payday loan companies had no choice but to open more payday loan stores to maintain their profits as the overlapping loans and bad debts piled up. The increased overheads plus the increased registration fees are eventually borne by borrowers, making it even harder for them to clear their debts.
In China, the cash loan providers rely on data to tell the potential risks posed by overlapping loans. Unfortunately, the data on a borrower’s borrowing history is often not readily available. All they get from a risk management services providers are merely borrowers’ registration information on other online lending platforms as long as the borrowers don’t have any loans overdue.
Plus, the cash loan providers have a reputation of playing tricks while sharing their customer data with the risk management services providers like Tongdun. The data shared is often mixed with fake information, so the seemingly “dependable data from the risk management services providers” is not dependable at all.
On the surface, everything is perfectly normal, but underneath is a market flooded with overlapping loans.
“Borrowers who have a borrowing history on two or more platforms account for almost 60% or even 80%,” an employee from a consumer finance company told Kr-Asia. “Borrowers who have borrowed from three to five platforms are not less than 30%.” These borrowers are three times or four times as likely to delay their loan repayment.
But the new entrants to the cash loan sector are not in the least deterred. Maybe this market is not for the faint-hearted. Traditional financial institutions take risk management as the cornerstone for their lending businesses. In the unfettered cash loan sector, “it doesn’t matter much if you don’t know the first thing about risk management. It is easily addressed with money,” said Xu Qing.
“Only with some 200,000 yuan, the cash loan providers can get our risk management system and one-stop service, including installation, debugging and training. With that, they can run their business.” This is how much Xu’s company charges for their risk management system and services. That is about the average price of all risk management systems offered on the market. “Additional fees will be charged each time if the buyer wants to import customer data from risk management services providers into the system. We get commission from the third parties.”
Such system offers all functions that cash loan providers might need, including funneling traffic, documents submitting, importing external data, risk management, issuing loans and more. The best part is the function modules of the SaaS-based system can be upgraded at any time. With the system in hand, the company Xu Qing is working with has also decided to put it to use and stepped into cash loan business. “Loans we issue every month are only a small amount, merely tens of millions yuan. We only want to put the system to the test. Earning profit is only icing on the cake.”
Like loan brokers, the companies selling risk management systems are also elbowing their ways into the already crowded cash loan market. This huge army will only further fuel the competition in the cash loan sector.
This indicates that any company with money and customer source can get a slice of this huge market. Some companies offering usury that previously dealt only offline are also squeezing into the cash loan sector as if this sector is not crowded enough.
Part 6. The cash loan providers won’t laugh for long as the government tightens its grips on the cash loan sector.
Obviously, it is the high return brought by the high interest rate that constantly lures all the companies into the cash loan sector. But that craze won’t last for long. Eventually, companies’ craze for cash loan businesses will die down as the cash loan sector is hauled back to a normal trajectory.
The payday loan once boomed in the U.S. went through the same process – the payday loan rose with the tide of “decentralizing loan business” in the 1990s. In less than 30 years, it has already entered into its twilight years.
To regulate cash loan business, regulations and laws were introduced at both the state and federal levels. The effect was immediate. Many payday loan companies including EZCorp, First Cash and Cash America narrowed their payday loan businesses soon afterwards. Some of the companies even faced the fate of getting unlisted on the stock exchange market. Well, troubles never come single. In July 2016, Google advertising also closed its doors to all cash loan providers.
Luckily, the big payday loan companies in the U.S. all have their own pawn businesses which had helped them pull through when their payday loan businesses ran afoul of the newly released regulations.
That risk is also beginning to loom in the Chinese cash loan market. Cash loan is again driven to the edge after only half a year.
In April 2017, the China Banking Regulatory Commission (CBRC) issued the Notice on Regulation of Micro Lending Business Activities (the Notice) and the Supplementary Instruction on Regulation of Micro Lending Business Activities successively to rein in Chinese cash loan businesses. Following the issuance of the two regulations, the platforms including 429 apps, 72 WeChat official accounts and 117 websites that were embroiled in the issues including “charging unreasonably high interest” and “collecting debts with violence” were shut down.
However, the crackdown on cash loan, which was supposed to send shock waves to the whole sector, petered out to nothing. This gave the cash loan providers a window to breathe.
The clout of CBRC didn’t reach any further because its targets were mainly P2P lenders and micro-lenders under its supervision. That’s why other cash loan providers had managed a narrow escape. Plus, the measures taken by CBRC at that stage were only intended to “gather opinions’. It didn’t initiate a “blanket ban” on cash loan businesses though it is supposed to clamp down on the issues including “charging unreasonably high interest rate” and “collecting debts with violence”. Besides, no detailed guidelines were formulated at that moment.
After that sobering lesson, the leading cash loan providers that value their brand images took the lead to lower their interest rates. The small-scale cash loan providers, however, soldiered on regardless.
“I will take the chance to make more money while I still can. It’ll be too late when the regulation gets serious,” a cash loan provider told Kr-Asia. Many cash loan providers have communicated with CBRC through different channels. They all believe that the CBRC is unlikely to take a sweeping approach towards all cash loan businesses.
Or, as suspected by most cash loan providers, the CBRC itself hasn’t yet figured out how to regulate cash loan.
The National Internet Finance Association of China (NIFA) recently submitted a survey report on cash loan to CBRC. “We didn’t place any of our comments in the report. It’s just an objective description of the current status of cash loan sector,” a member in NIFA told Kr-Asia. Maybe the NIFA doesn’t want to exterminate the cash loan sector either, that’s why it didn’t include any “comments” in the report.
The CBRC too is yet to make a clear stance. “The departments within CBRC have divided opinions on how the cash loan sector shall be regulated. They are struggling to reach a consensus within the CBRC. That’s why the CBRC stopped at the Notice issued in April 2017,” the member spoke to Kr-Asia earlier said.
The CBRC’s hesitance has given cash loan providers a glimpse of hope. Many cash loan companies have exploited this opportunity to go public, believing that “they are less likely to fall as they grow bigger” and that “the law can’t be enforced when everyone is an offender”. But, the calm was soon broken by Qudian’s high-profile listing on the stock market, which has sparked a heated debate on cash loan. The CBRC can no longer sit on their hands.
“The CBRC is about to get serious about its crackdown on cash loan,” a cash loan provider told Kr-Asia. The new regulations cover the following aspects:
- The annual interest rate (which shall include all additional charges) shall not exceed 36%;
- Violence is prohibited for debt collection;
- The traditional financial institutions including banks shall not carry out lending businesses with unlicensed lenders;
- All lenders shall obtain license before getting into cash loan businesses.
The first two rules seem to be nothing new. But this time they are not just paper talk. The CBRC will see to it that these two rules are strictly exercised. The rule that the cash loan providers shall keep their annual interest rate within 36% alone is enough to cut their profits by a large margin and render them unable to sustain their operations. “The return from issuing cash loans will plunge as soon as the interest rate is pulled back to a normal range,” Wang Feng told Kr-Asia.
Once the rule is enacted, all cash loan platforms used to exploit high interest rate to cover up their bad debts will crumble. The blow is lethal to almost half of the cash loan providers.
But the last two rules will weigh even more heavily on the entire cash loan sector.
To stop the cash loan sector from swelling up any further, the only thing the CBRC needs to do is stopping feeding the cash loan providers with capital. That’s an incredibly smart move. Previously, much of the capital the leading cash loan providers had was obtained from the traditional financial institutions at a relatively low cost. This benefit will no longer be available once the rule is enacted.
According to the information provided by a cash loan provider, many licensed traditional financial institutions are beginning to distance themselves from cash loan providers. The commercial banks that once took great interest in cash loan businesses are also beginning to terminate their cooperation with cash loan providers. The capital planned to be entrusted to cash loan providers is also withdrawn.
Worst of all, the lenders could be rendered unqualified to continue their cash loan businesses. This deals an even deadlier blow to cash loan providers compared with the fact that they can’t get low cost capital.
The ticket to the cash loan sector, the license! “It will get increasingly harder for cash loan providers to get financial service license. Some key licenses will not be granted or suspended for trading. A cash loan provider is not allowed to issue cash loans without license, so the longer the cash loan provider doesn’t get the license, the further it falls behind the leading cash loan providers,” said Xu Hongyan, Director of the Internet Finance Center of Suning Financial Research Institute.
Will the licensed cash loan providers that play by the rules be immune to the impact?
Not entirely. As soon as the new regulations come into effect, many small-scale cash loan providers will collapse. This means that many borrowers with overlapping loans will no longer be able to “continue borrowing to patch their debt holes”. This risk posed by the bad debts will gradually spread to cash loan providers of larger scale or even send ripples across the whole sector, producing systematic risk.
“Some cash loan providers have no respect for the rules in this sector. They are reckless. If they go on like this, the market will be buried sooner or later.” This was the prospect many cash loan providers had envisioned before the CBRC issued the new regulations.
As the CBRC starts to rein in the cash loan sector that has run wild, the cash loan sector will definitely go through some dramatic changes. The cash loan providers that have advantages on technology, funneling traffic, risk management and capital cost are more likely to thrive under the new regulations.
A “storm” is about to befall on the cash loan sector and there’s no escape for any cash loan provider. The abnormal high return in the cash loan sector is bound to vanish. This is a process that all new sectors will go through. Hopefully, a new order will be built in the sector after the painful restructuring.