Recently, the Fujian Local Financial Supervision and Administration Bureau issued the Administrative Measures for the Assessment and Evaluation of Microfinance Companies in Fujian Province (Draft for Comments), which clarifies that when a microfinance company has "an annualized comprehensive rate of more than 24% for a single loan", the annual assessment and evaluation result is unqualified. If the assessment results are rated as unqualified, the regulatory authorities will focus on supervision, issue rectification notices, increase the intensity of clean-up and disposal, and urge and guide relevant companies to rectify in a timely manner, or withdraw from the microfinance industry in an orderly manner.
Fujian's local requirements for credit interest rates are among the highest in the country. The consumer finance industry understands that consumer finance companies in the region were earlier guided by the regulator to set the pricing cap at 24%.
At present, the national consumer finance agency also has this requirement. However, according to the feedback of peers, some consumer funds have not been able to do so, mainly because the asset shortage has become more and more serious in recent years, and if institutions want to grow, they have the more impulse to break through 24%, and tend to expand to less than 36% of assets.
The Fujian local government plans to limit the pricing of microcredit companies to 24%, which will have a greater impact on the current partners who carry out high-priced assets. The consumer finance industry has learned that in practice, in the personal loan chain, small loan companies generally act as the back-up financiers of lending institutions, and are the de facto last lenders when banks and other financiers are unable to lend. If more than 24% of the business is prohibited, the profitability and scale growth of the cooperative institution will be greatly negatively affected.
At present, one of the affiliated small loans of the leading loan platform is located in Fujian.
The consumer finance industry has learned that the current waist loan platform and local small loans are the main force of more than 24% of the customer base. If similar policies are extended to the whole country, it will have a huge negative impact on the capital supply of consumer finance and small loan companies, the scale of the industry may shrink by hundreds of billions of yuan, the profitability of relevant institutions will fall seriously, and the risk of high-priced customers will rise. If the customer base is forcibly relocated to less than 24% for compliance purposes, the credit assets of the industry will be affected, which may lead to a further increase in risk.
In recent years, the regulation of credit interest rates has been continuously strengthened, and the effect has been remarkable. On September 24, 2013, the self-discipline mechanism for interest rate pricing in the interbank market was formally established, and under the guidance of the People's Bank of China, commercial banks actively implemented the regulatory requirements and continued to benefit the real economy.
As early as 2020, the relevant policies of the central bank have indicated that commercial banks can independently negotiate with customers to determine deposit and loan interest rates in accordance with relevant regulations. Therefore, when the lender is a financial organization, the restriction of 4 times the LPR of the judicial interpretation on private lending does not apply. It mainly includes 7 categories: small loan companies, financing guarantee companies, regional equity markets, pawn shops, financial leasing companies, commercial factoring companies, and local asset management companies approved and supervised by local financial regulatory authorities.
The Notice on Regulating and Rectifying the "Cash Loan" Business (Rectification Ban Han [2017] No. 141) issued in 2017 pointed out that "the comprehensive cost of funds charged by various institutions to borrowers in the form of interest rates and fees shall comply with the provisions of the Supreme People's Court on the interest rate of private loans (i.e., 4 times the LPR)". However, the industry believes that the definition of "cash loan" in Circular 141 is a business with the characteristics of no scenario support, no designated purpose, no customer group limit, no collateral, etc., and in reality, banks, consumer finance, small loans, etc., are engaged in consumer loan business with consumption scenarios, and most of them do not fall into this category.
In recent years, the interest rates of banks, consumer finance and other institutions have been declining. In order to compete for high-quality customers of consumer loans, the credit interest rate has even come to about 3%. Therefore, in the market environment of continuous profit concessions, according to the feedback from the peers, it is unlikely that the future supervision will explicitly introduce mandatory interest rate indicators for commercial banks.
However, there is still a lot of debate about the mandatory requirement for interest rate restrictions for microfinance institutions. Some voices believe that it is necessary to reduce the credit burden for all financial consumers, while others believe that small loans are different from banks, and most of the customers are sinking groups, and the risks are higher. Once the limit is imposed within 24%, the needs of a part of the customer group will not be covered, or will fall back into the hands of black and gray industries such as "loan sharks".
From a macro point of view, the life of small loans is not easy either. From 2021 to 2023, the number of institutions and loan balances of microfinance companies nationwide will show a downward trend. By the end of 2021, there were 6,453 microfinance companies in China. The balance of loans was 941.5 billion yuan, an increase of 55 billion yuan for the whole year. As of the end of December 2023, there were 5,500 microfinance companies in the country. The balance of loans was 762.9 billion yuan, a decrease of 147.8 billion yuan for the whole year.
Statistics from the consumer finance industry found that by the end of 2023, the number of microcredit companies in Fujian was 112, down from 121 at the beginning of 2019 by 9. At the end of 2023, the balance of small loans in Fujian was 34.9 billion yuan, accounting for 4.57% of the country's total, far lower than the balance of 100 billion yuan in Chongqing and Guangdong, but the overall trend is rising. Due to their small size, the representation of local microcredit companies is limited. If the new regulations are implemented, the comprehensive pricing of small loans in Fujian and other regions may be further tightened to less than 24%. In the context of asset shortage, the short-term growth of local microcredit will be limited.
At present, the regulatory standards for small loans vary from place to place, but for platforms with a high proportion of high-priced businesses, it is still necessary to pay attention to policy risks. In the context of the continuous decline in LPR interest rates, the regulator's interest rate guidance for banks, consumer finance, and small loans has always been required to decline, especially the loan interest rates related to inclusive and small and micro loans.
The reality is that since 2023, some small loan and small and medium-sized loan platforms have moved significantly towards 36% of their assets due to the weak profitability or even loss of assets within 24%, coupled with the strong supervision of members and equity packages. In the process of economic warming, the sinking customers they serve need to borrow to transition. The regulator intends to reduce the liabilities of sinking customers and tighten lending rates. In this process, there seems to be a contradiction in the industrial chain. However, in the long run, the whole industry has always maintained a dynamic balance between compliance and risk from different perspectives. After the financial sector is fully regulated, it is time to put the ability to operate risks in the sinking market to the real test.