As a result of the rapid growth in consumption expenditure in China, China’s consumer finance market has experienced significant development in recent years. the balance of outstanding principal of loans in the consumer finance market increased from approximately CNY 4.45 trillion in 2013 to CNY 10.47 trillion in 2017, representing a CAGR of 23.9%.

However, as compared to the large and continuously growing consumption needs, the penetration and density of China’s consumer finance market is still low, which indicates significant growth potential. The balance of outstanding principal of loans in consumer finance market is expected to reach approximately CNY 30.74 trillion by 2022 with a CAGR of 24.0% from 2017 to 2022.

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Higher growth rate of consumption loans as compared to other personal loans

In the personal credit market, consumption loans demonstrated faster growth compared to other personal loans over the past years and are expected to continue to grow rapidly in the foreseeable future.

The balance of outstanding principal of consumption loans increased at a CAGR of 23.9% between 2013 and 2017, which outpaced the growth rate of other personal loans at 18.1% over the same period. The balance of outstanding principal of consumption loans is projected to continue to grow at a CAGR of 24.0% from 2017 to 2022, which will continue to outpace the growth rate of other personal loans at 9.8% over the same period.

The strong growth of consumption loans is driven by the expanding consumption demands of increasingly diversified consumers, which challenges the ability of consumer finance service providers to evaluate the credit profile of the broad population in a cost-efficient way.

Higher growth rate of online consumption loans as compared to offline consumption loans

Consumption loans are primarily offered through two different channels in China: traditional offline retail outlets and online channels on websites and mobile devices. Online consumption loans grew faster than offline consumption loans over the past years, and are expected to continue to grow rapidly in the foreseeable future.

In China, traditional offline channels, mainly operated by financial institutions, play a primary role in the consumer finance market. However, financial institutions face a number of challenges brought by the changing demands of the market, including their slow process in technology upgrades and innovation, slow reaction to new market opportunities and a lack of operational efficiency.

As China’s consumer finance market moves online, online consumer finance service providers, including licensed consumer financial companies, e-commerce driven installment platforms and independent online consumer finance companies, have emerged in recent years to fulfill the fast growing and unmet consumption demand.

As the national consumer credit database maintained by the CCRC continues improving its data coverage and availability along with other growing alternative databases, Chinas online consumer finance service providers have gained greater access to various consumer data as the basis of their credit assessments. Compared to traditional financial institutions, online consumer finance service providers are more capable of managing and pricing credit risks through automated process utilizing big-data analytics technologies. In addition, they are more sophisticated in designing innovative products for and interacting with the tech-savvy younger generation.

The balance of outstanding principal of the online consumption loans has increased from approximately CNY 13.41 billion to CNY 1,037.23 billion between 2013 and 2017, representing a CAGR of 196.5%, and is expected to reach approximately CNY 7.54 trillion by 2022 at a CAGR of 48.7% between 2017 and 2022, which significantly outpaces the growth rate of offline consumption loans. The balance of outstanding principal of offline consumption loans has increased from approximately CNY 4.44 trillion to CNY 9.43 trillion between 2013 and 2017, representing a CAGR of 20.8%, and is expected to reach approximately CNY 23.20 trillion by 2022 at a CAGR of 19.7% between 2017 and 2022. In terms of the balance of outstanding principal as of December 31, 2017, approximately 59.0% of the offline consumption loans are credit card loans, which generally do not generate interests as long as the credit card holders repay the loans on time.

ONLINE CONSUMER FINANCE MARKET IN CHINA

Market Overview

Online consumer finance market provides consumption loans through online channels on websites and mobile devices. Fueled by Chinas robust consumption growth, China’s online consumer finance market has experienced significant growth along with the increasing Internet and mobile penetration over the past years. With the development of technology infrastructure, Chinese consumers are becoming increasingly receptive to online consumer credit products. In 2017, the number of online consumer finance users in China increased to 197.5 million, which accounted for approximately 25.6% of the total number of China’s Internet users, and is projected to increase to 414.8 million in 2022. The balance of outstanding principal of loans in the online consumer finance market increased from approximately CNY 13.41 billion to CNY 1,037.23 billion between 2013 and 2017, representing a CAGR of 196.5%, and is forecasted to expand further and reach approximately CNY 7.54 trillion by 2022, representing a CAGR of 48.7% during the period of 2017 to 2022.

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In May 2008, the CBRC and the PBOC jointly promulgated the Guiding Opinions, which sets out the fundamental requirements for establishing, registering and operating a microfinance companies at the national level. This was a significant step in advancing the industry and led to a rapid increase in government registered microfinance companies in China. In addition, through issuing The Guidance on Financial Support for Adjustment and Transformation and Upgrade on Economic Structure (关于金融支持经济结构调整和转型升级的指导意见) in July 2013, the PRC Government increased its support in the microfinance industry and provided guidance on the diversification of customer segments, as well as access to funding at a lower cost.

The number of government registered microfinance companies in China grew substantially from 4,282 as at 31 December 2011 to 8,673 as at 31 December 2016, representing a CAGR of about 15.2%. As at 31 December 2016, there were 8,673 registered microfinance companies in China. It is forecasted that this will continue to increase and reach 10,180 government registered microfinance companies in 2020. The total registered capital in the microfinance industry in China amounted to CNY 823.4 billion as at 31 December 2016. In addition, the total amount of outstanding loans granted by all the services providers in the microfinance industry increased from CNY 391.5 billion in 2011 to CNY 927.3 billion in 2016, representing a CAGR of 18.8%. The total amount of outstanding loans granted by microfinance companies represented 0.7% of the total principal amount of outstanding loans granted in China in 2011, and increased to 0.9% in 2016.

The rapid expansion of the microfinance industry in China is due to the increased demand for microfinance services from SMEs, microenterprises and individual proprietors. Due to favorable government policies under the 12th Five-Year Plan and the overall macroeconomic development of China, the number of SMEs and microenterprises increased from 49.9 million in 2011 to 74.9 million in 2015, representing a CAGR of approximately 10.7%.

Despite their increase in numbers and significance in China’s economy, SMEs, microenterprises and individual proprietors remain underserved by banks. Banks are reluctant to lend to SMEs, microenterprises and individual proprietors because of their smaller business sizes, lack of sufficient collaterals and higher risk of default. SMEs, microenterprises and individual proprietors may also subject to longer processing time associated with the loan applications. Microfinance companies thus fill the gap to provide micro and small loans to SMEs, microenterprises and individual proprietors.

Difference Between Rural Banks and Microfinance Companies

In general, the requirements of rural banks are higher than those of microfinance companies. Rural banks usually only accept first charge and microfinance companies usually accept first charge or second charge. With respect to the requirement on loan guarantor, rural banks usually require a medium or large enterprise to act as the guarantor and microfinance companies usually accept an individual or a small enterprise to act as the guarantor. Rural banks usually take a longer time than microfinance companies do to approve loans, but offer a more favorable interest rate.

Customers will decide whether to obtain a loan from a rural bank or a microfinance company by taking into account their own conditions for securing a loan and the degree of urgency of their fund demand as a whole. If customers fulfill the requirements of a rural bank for granting loans and do not have an urgent fund demand, they will usually choose to borrow from a rural bank and will not consider borrowing from a microfinance company. If customers do not fulfill the requirements of a rural bank for granting loans, or have a relatively urgent fund demand, they will usually choose to secure a loan from a microfinance company and will not consider borrowing from a rural bank.

As such, since rural banks and microfinance companies have different requirements for granting loans and time needed for approving loans, they have different customer base. Therefore, there is no competition between rural banks and microfinance companies.

The post Microfinance Industry in China first appeared on CRI Report.