China plans caps on Ant's lending rates to control risk: sources

[NEW YORK] China's financial regulators plan to cap the interest rates Ant Group can charge borrowers on quick consumer loans, a move that could curb the financial technology giant's biggest revenue driver as it prepares for a mega initial public offering (IPO).

Loans made by Ant Group and other consumer lenders will be subject to a ceiling imposed by a China Supreme Court ruling last month, said people familiar with the plans, who asked not to be named as the information is private. Linked to a benchmark rate, the cap is currently 15.4 per cent. The court said the rule doesn't apply to licensed financial institutions, but it so far hasn't specified whether it would impact fintech firms such as Ant.

While the rule isn't targeting Ant specifically, the company is now the largest in online consumer lending, often helping smaller banks in competition with China's largest lenders. Ant, the cornerstone of the Alibaba Group Holding empire, tracks the spending behaviour of hundreds of millions of users on China's biggest online malls, helping analyse their creditworthiness. It's said to be poised to raise US$30 billion in an IPO.

Ant has worked with about 100 banks, doling out 1.7 trillion yuan (S$340.05 billion) of consumer loans and 422 billion yuan in small business loans as at June 30. Only about 2 per cent of the loans sit on Ant's balance sheet, while the rest are offered by third-party banks or have been packaged as securities and sold on, according to its prospectus. It's unclear what proportion of Ant's loans are issued at a rate above the court's threshold.

"Ant's profit margin will likely shrink," said Wang Zhen, a Shanghai-based analyst with UOB-Kay Hian. "It's very likely that after Ant's IPO, consumer lending will not be its biggest source of revenue growth going forward."

The company declined to comment in an emailed statement. The China Banking and Insurance Regulatory Commission didn't immediately respond to a request for comment.

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Ant's lending business has grown to become its biggest source of revenue as it faces growing competition in the online payments market. Lending revenue jumped 59 per cent to 29 billion yuan for the first six months of the year, accounting for 40 per cent of the group's total. That's underpinning Ant's plans to seek a US$225 billion valuation in its pending IPO.

Its Huabei product, similar to a credit card, and Jiebei, a type of unsecured consumer loan product, mostly charge about 0.04 per cent or lower on a daily basis, or about 15 per cent annualised. For its more than 20 million small business borrowers, the annualised lending rate was below about 11 per cent in the 12 months through June. Still, that's almost double the average 5.94 per cent rate small borrowers can get from banks.

The new loan ceiling issued by China's Supreme Court isn't a set rate. Under the rule, rates can't exceed four times the benchmark Loan Prime Rate (LPR). Based on the latest LPR, the ceiling would be lowered to 15.4 per cent from a range of 24 per cent to 36 per cent under a previous judicial interpretation in 2015.

While it's unclear whether firms must use an annual percentage rate or internal rate of return (IRR) for the new threshold, Ant is expected to receive some leeway because of its efforts to support small businesses during the virus outbreak, one person said.

If calculated on an IRR basis, most credit card companies wouldn't be able to comply with the rules since their rates average about 18 per cent, said UOB-Kay Hian's Mr Wang.

Ant said in its IPO prospectus that its partners also include policy banks and large national state-owned lenders. It added that a ceiling could force changes to loan pricing or the business model as a whole, resulting in "material and adverse" effects.

Lian Ping, head of research at Zhixin Investment and former chief economist at Bank of Communications, said the cap may drive some weak lenders out of the market because they won't be able to price risks properly or cover their funding costs, tightening the credit supply.

Still, Ant can help banks reach previously underserved consumers and small businesses, said Yin Zhentao, director of the Research Center for FinTech, Chinese Academy of Social Sciences.

Ant "can support partner financial institutions", said Prof Yin. "This kind of collaboration is in line with China's policymaker's objective to stimulate domestic consumption."

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