More than half of all companies have been pruned from the peer-to-peer (P2P) lending market after regulators introduced tougher rules aiming to curb illegal and risky lending practices.
The tightened regulations over the past three years, including introducing a new trial registration program that will require platforms to register on a monitoring system, has not only led to the collapse of many smaller platforms but larger players are feeling the pressure as well.
However, despite the country’s on-going efforts to clamp down on illegal lenders, predatory lending platforms that haunted Chinese school campuses in 2016 have resurfaced.
Predatory student loans again became one of the trending topics on Weibo in the past few weeks, after Chinese media National Business Daily reported (in Chinese) earlier this month a large percentage of online lenders still have loan operations that target college students. Articles with the hashtag “campus loans rising from the ashes” (校园贷死灰复燃, our translation) attracted 280 million views in one day.
Bottom line: Although regulators cracked down on campus loans in 2017 and forbid lending platforms to target vulnerable groups like university students under the age of 18, many still have a thriving business under the regulatory radar. Blanket actions have put an end to many scams and fraudulent practices, but there are deeper problems under the surface, including debt-loading Chinese millennials.
- 42% of the platforms tested by the National Business Daily still lend to students or have active loan businesses on campus. Some platforms were found offering loans to students at annual interest rates as high as 199%.
- Many illegal lenders allow students to get loans with their student cards or resident ID cards. Making borrowing as easy as by a few clicks on smartphone help platforms expand their user bases faster.
- The list of predatory platforms includes those backed by big tech firms: New York-listed PPDai, fintech platform WeCash, and PPmoney (Jidai). These platforms either still have active operations on campus or have failed to enforce their policy against lending to students.
- The collection of repayments is often enforced by violent thugs who blackmail or threats of violence or harm to intimidate the borrowers. Some women were forced to send lenders images of themselves nude or performing pornographic acts as collateral. These predatory lending services continue to thrive in regulatory loopholes.
A brief timeline: Fintech services started to flourish in China with increasing access to the internet, rising disposable income, and the prevalence of mobile devices. Online lending was one of the industries that saw rapid growth.
For years, regulators let P2P lending industry grow under lax regulations. As a result, the industry has been plagued with scammers and fraudulent platforms.
In 2015, the industry was at its peak, but cracks soon appeared.
- P2P lending platform Ezubao, a Ponzi scheme, was abruptly shut down in December. It was later revealed that the platform had defrauded RMB 59.8 billion ($9.14 billion) from more than 900,000 investors.
In 2016, news of students unable to repay mounting debt committing suicide made headlines. Universities did little to stop it. Public pushback over the practices of loan companies prompted the government to act.
- In May, the Ministry of Education and the China Banking Regulatory Commission (CBRC) issued a notice to universities urging them to regularly monitor illegal on-campus lending practices. The first major regulatory move against campus loans.
- The CBRC rolled out regulatory measures to counter growing predatory loans on campus in different regions across the country. Many companies suspended their lending operations on campus.
In 2017, regulators started to tighten rules for the consumer lending industry, including loans to college students and abusive debt collection practices.
- In April, the CRBC called for actions to prevent online lending institutions from offering loan services to university students under 18 years of age and to market their products and services to borrowers without the ability to repay, among other illegal practices.
- In June, the CRBC, along with the Ministry of Education, and the Human Resources and Social Security Ministry issued a joint directive to ban lending institutions from extending credit to university students with only a few exceptions.
- At the same time, lending to households and individuals for consumption grew at an alarming rate. Regulators began enforcing tougher rules on banks to tighten scrutiny on consumer loan applications.
In 2018, regulators tightened their grip on illegal loan activities, leading to the collapse of hundreds of smaller lenders.
In 2019, illegal campus loan activities that seemed to have died down, resurfaced. According to Chinese media, not just small online platforms, but also leading P2P lenders continue to give out loans to university students.
P2P lending platforms feel the pressure as regulators squeeze them out of the market
Rising from the ashes: Despite continued government efforts to eradicate illegal lending platforms from school campuses, the problem persists. It remains unclear whether more measures will be rolled out to curb campus loans, but Huang Dazhi, senior researcher at Suning Financial Research Institute, told TechNode that regulators have already made it clear over the past three years of that the industry will continue to shrink and only compliant platforms will remain.
- A recent wave of illegal repackaged campus loans, with more legitimate-sounding names such as consumer installment loans, allow consumers to repay debt in set intervals.
- Other forms of illegal lending methods are gaining momentum like “career training loan programs” (培训贷, our translation) that dupe fresh graduates or young people seeking to develop professional skills into enrolling training programs that cost tens of thousands of renminbi. Many of these programs, often jointly set up by career training services and P2P lenders, attract victims with the promise of job offers upon completion of the program.
- The issue is perpetuated by social media and entertainment platforms’ inability to keep off advertisement of predatory loans. Illegal lending platforms still use popular sites Weibo, streaming platforms like Tencent Video, and game apps as vehicles to spread their message, and more students have fallen victim because of it.
Addiction to debt: As opposed to financial institutions that often have strict eligibility requirements, illegal online lending platforms have a very low threshold when giving out loans have a special appeal to university students.
- Policy banks in China offer financial aid or scholarship programs, and commercial banks aren’t proactive in the space.
- The quick rise of illegal lenders is also fueled by the younger generation’s addiction to debt. Platforms are more than happy to court tech-savvy millennials, a major driver of consumption.
- Ant Financial’s Huabei, JD’s Baitiao, and a myriad of online lending platforms have become essential channels for young people to secure loans. Illegal platforms too thrive in the same fertile ground.
- According to data (in Chinese) from Rong 360, 50.17% of the “post-90s” generation of consumers borrow for their daily consumption. Over half of the young people resort to online lending services (not including credit card, Huabei, and JD Baitiao).
- Other statistics show that the post-90s and the post-00s generation account for 43.48% of total consumer debt and around a third of them take out additional loans to repay debt.
The big picture: Since 2008 when China loosened its credit conditions in a bid to stimulate its economy amid the global recession, household borrowing increased rapidly. This was followed by years of risky lending and eventually led to the rise of online financial services including P2P activity.
- The central bank recently released a three-year development plan to strengthen support for the fintech sector and strengthen financial risk control.
- Heavy-handed regulations have led to the collapse of hundreds of lending platforms. Recently, even larger companies have started to pivot away from the P2P lending business as regulators introduce tougher rules.
Predatory lending platforms’ abusive practices have ruined many young lives. Their stories became news with sensational headlines, but it is unclear whether regulators are taking real action to stop illegal activities.
The student loan problem is just a small part of China’s massive financial system, but it has revealed deeper issues. The younger generation’s culture of irrational spending creates a demand for credit, and illegal lenders continue to feed on it. Large financial institutions are being encouraged to come in and fill the need, but they remain inactive. Although regulators have intervened numerous times over the years with general guidance and rules, illegal practices persist in dark corners.