China's new rules on online lending of commercial banks take a prudent but open approach to balance innovation and risks in the sector, industry experts said.
The China Banking and Insurance Regulatory Commission had announced the new rules for the sector earlier this month. The new rules are seen to be more accommodative about the presence of third parties in the online lending operations of banks.
Jay Xiao, CEO of Lexin, an online consumer finance platform, believes that the new regulations will boost cooperation with the fintech sector. "The regulator is encouraging cooperation between banks and fintech players, which indicates a positive transition of its attitude toward fintech platforms… and the industry will be able to grow to its full potential in the coming years."
Since the new regulations stipulate a clear framework for online lending, it should ease the regulatory risk concerns expressed by some banks, said a report from UBS, a Swiss investment bank.
"We expect regional banks to benefit the most from the relaxed rules, while national banks may also become increasingly willing to scale up their online lending business partnership with fintech lenders," the report said.
The CBIRC has spelt out clearly the risk governance requirements for online lending, banning banks from outsourcing risk management.
It has also spelt out the requirements on information disclosure, data protection and loan collection to better protect consumers. The new rules also aim to safeguard banks against risks resulting from third-party cooperation through enhanced qualification requirements and sufficient disclosures to borrowers, Morgan Stanley analysts said in a research note.
The new rules will provide near term sentiment support to quality online loan facilitators, as the tightened requirements for third-party cooperation will lead to market consolidation, the analysts said.
However, some experts feel that the regulator should provide more details about the loan facilitation model between banks and third parties to make the online lending process more smooth.
The CBIRC said commercial banks should make it clear in contracts that under the loan facilitation model, their partners－excluding insurance companies and licensed guarantee companies－are not allowed to charge interest or fees in any form from the borrowers. Therefore, banks will have to include the service fees their partners previously charged the borrowers in the overall interest and fees of their online lending services.
Currently, large banks are not keen to partner with third-party players to offer online loans to small businesses due to concerns that comprehensive financing costs of the businesses will go beyond regulatory expectations after service fees charged by third parties are included in bank contracts, said Bai Xuemei, vice-president of CD Finance, a rural microfinance institution headquartered in Beijing.
"Regulators should specifically define the range of comprehensive financing costs for companies that are acceptable to them. They should also take into account that the amount of labor contributed to the online lending cooperation between banks and third-party institutions varies from one institution to another," Bai said.
For those players catering to small businesses and rural households in towns and villages, it is hard to cut their operating costs because the asset under management per client manager is very small, she said.
Commercial banks are also required to take appropriate measures to confirm that the data provided by their partners conform to relevant laws and regulations, in addition to verifying the authenticity of the data and making sure that their partners are authorized to use the data.
However, the regulator does not say clearly how far banks should go in terms of reviewing big data companies for partnerships.
As fintech companies are heavily reliant on data, the clearer the regulator defines the use of data, and the clearer the boundaries are between which data can be used and which cannot be used, the more capable fintech companies will be in giving full play to the value of data while conforming to laws and regulations, said Victor Li, executive vice-president of Pintec, a Beijing-based fintech total solutions provider.