What’s fuelling the growth of China’s online microlenders?

CHINA is seeing a paradigm shift in how its people manage their personal finances — and it’s fuelling the online microlending business in the country.

Up until now, loans had a bad reputation in China and people steered clear of moneylenders and financial services institutions offering loans and advances of any kind. This was especially true for payday and short-term loans. In fact, except for mortgages, borrowing money for other purchases or investments wasn’t common.

Millennials, on the other hand, are borrowing money — small amounts — for anything and everything. Even a burger.

“Paying by installment is becoming a habit among young Chinese [born after 1990]. They prefer installments because they are more interested in trying innovative things [and] don’t have much money, but are still very optimistic about the future,” Jay Xiao Wenjie, founder of Lexin and operator of the online shopping center Fenqile told local media.

While interest rates differ based on the product price and repayment period, and some loans are offered interest-free, these new-age online microlenders make life easier for the new generation.

Given the high property prices and low average monthly income in the country, many young people are more likely to rely on credit for daily consumption items — which is facilitated by mobile payment apps and a few clicks and swipes on a smartphone.

As of June this year, Fenqile revealed that it had 29.2 million registered users and 95 percent of its customers were under 30 years old.

Since the company uses an artificial intelligence-based algorithm to approve a new user’s credit within seconds, acquiring customers becomes easier.

While the trend is getting more popular, it is important to remember that the country’s financial regulators expressed concern about the quick growth of online microlending firms last year and circulated new rules to local governments targeting fast-growing online micro-lenders, part of a campaign to rein in a rapidly developing financial sector.

According to Reuters, under the new rules, unlicensed organizations and individuals are not allowed to conduct a lending business and lending institutions are also not allowed to give loans to borrowers who have no source of income or to mislead consumers into over-borrowing.

“Amid the rapid development of cash loans — while they have played a role in meeting the normal credit needs of some groups – problems such as over-lending, repeat borrowing, improper collection, abnormally high-interest rates, and privacy violations have become prominent,” a multi-ministry task force said in a statement then.

From the looks of it, the checks and balances put in place by regulators last year have worked, but there is still room for improvement — maybe by educating the youth about the challenges of loans and the benefits of savings.

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