Consumer credit fails to fulfil promise
The mainland's 1.3 billion people may suggest boundless opportunities for consumer credit companies but the experience of this fledgling industry has been anything but promising.
After operating for more than three years, the mainland's first consumer finance companies are still struggling to compete with banks, private lending intermediaries and even retailers.
"The industrial landscape has changed a lot since the inception of the first consumer credit companies in 2010," said Guo Tianyong, a professor at the Central University of Finance and Economics. "Only those with clear positioning and capable of expanding will be able to survive the more intensive competition in the next few years."
Four consumer credit companies were launched in Shanghai, Beijing, Chengdu and Tianjin in a pilot scheme to stimulate the economy in the wake of the 2008-09 global financial meltdown.
Three of them were founded by banks - Bank of China, Bank of Beijing and Bank of Chengdu - while the fourth licence went to Home Credit China, a unit of the European financial firm PPF.
Car and home purchase financing were kept out of their ambit to avoid competition with banks.
The companies, which are not allowed to take deposits, were set up to provide non-collateralised credit to individuals for buying durable goods such as household appliances and to fund expenditures such as education, weddings, home decoration or tourism, according to the China Banking Regulatory Commission.
The ceiling for the loan amount was set at five times the borrower's monthly income before a new rule that took effect from January 1 changed it to 200,000 yuan (HK$256,000). Furthermore, the companies were only allowed to operate in the city of their registration before the government removed that restriction in November last year.
"Subject to the loan cap and location restriction, the business is destined to be small and lacklustre," said an executive with a consumer credit company who did not want to be identified. "While large information technology investment is involved and much time and energy is spent setting up credit rating systems and collecting debts, profits have been far from satisfactory."
From the beginning of last year to June 27, Bank of Beijing Consumer Finance, the mainland's largest consumer finance company, posted a net profit of 70.18 million yuan with registered capital of 850 million yuan, according to the lender. As of the end of October, the company had served 120,000 clients with loans of 7 billion yuan, or 58,300 yuan per client.
Zong Liang, a deputy head of Bank of China's international finance research institute, said: "Consumer finance companies have made some progress but the business volume hasn't been as big as was expected."
In a bid to revitalise the market, the central government removed some restrictions in November, expanded the pilot scheme to 10 more cities and the entire Guangdong province, and allowed private investors to enter the market.
The companies welcomed the move and were preparing to expand to other cities quickly before the competition heated up, a source close to the CBRC said.
Consumer finance companies avoid competition with banks by targeting people with no credit cards. However, the emergence of online private lending companies and the growing ambition of retailers to set up their own banks threaten their prospects.
CreditEase, a Beijing-based financial consulting platform, said its consumer loan clients included students, farmers, migrant workers, company employees and business owners.
Consumer finance companies usually acquire clients at the point of sale. A client who enters a store to buy a 2,000 yuan mobile phone or a television set, but who does not have enough cash, is a potential customer, according to Home Credit.
However, retailers and traditional business partners of consumer finance companies are seeking their own banking licences.
Nanjing-based Suning Commerce, a household appliance retailer, is among the first companies seeking regulatory approval to set up a bank after Beijing decided to encourage private investment in the banking sector last year.