Regulators crack down on improper lending methods

China has strengthened consumer lending regulations to prevent loans intended to finance consumption, such as education, traveling and home renovations, from being invested in housing and stocks.

Last year, local banking and insurance regulators imposed administrative penalties on numerous banking institutions nationwide.

Bank of Guiyang Co Ltd's Nanming subbranch was fined 300,000 yuan ($44,490) for granting consumer loans that actually flowed into the stock and housing markets.

Shanghai Pudong Development Bank Co Ltd's Shanghai branch was fined 1.5 million yuan, as its credit card cash installment service was used for non-consumption activities in 2016 and 2017. Also, the bank did not conduct due diligence to verify applicants' income.

The tougher regulations were triggered by the rapid growth in lending to the household sector. During the first three quarters of 2018, such loans increased by 5.69 trillion yuan from the beginning of the year, according to the People's Bank of China, the central bank.

"We noticed that lending to households and individuals for consumption, home purchasing and investments has grown very fast, which is very dangerous," said Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, on the sidelines of last year's National People's Congress.

Reducing leverage ratios in the country's corporate, government and household sectors will remain a major task of the CBIRC, he said.

Regulatory tightening has forced banks to step up scrutiny of consumer loan applications by requiring the borrowers to provide documents such as receipts, invoices or contracts to prove that the loans are truly used for consumption. Otherwise, banks may call in the loans early.

Nevertheless, borrowers could still withdraw cash from their account at a bank within the limit of a consumer loan, deposit the money into a non-lineal relative's account at another bank, and later withdraw the money in batches to invest in housing or stocks.

Under these circumstances, the bank that granted a consumer loan is unable to track the flow of every bank note related to the loan. Although regulators are capable of following the money, they cannot afford the huge cost, said Li Honghan, a research fellow at the International Monetary Institute, in an article published on Huxiu.com, a Chinese business information platform and forum.

To solve this problem more effectively, Li advised the regulators to impose administrative penalties on the borrowers for violating rules on the use of consumer loans, in addition to recording their misbehavior in consumer credit reports.

He noted that each bank should have data on those clients who obtained consumer loans connected to a centralized credit information system, and should update the information more frequently.

Apart from implementing stricter oversight of consumer loans, the authorities have also tightened their grip on loans to college students to curb overspending, as some are obsessed with keeping up with their peers.

"A country should set its hopes for economic growth on wealth creation, not on consumer loans," said Liu Kegu, academic advising team leader for the inclusive finance commission at the China Association for the Promotion of Development Financing.

"In my opinion, a consumer loan targeting college students is poison. Some merchants and financial institutions spare no effort to encourage young people to spend lavishly - wearing brand-name clothes and inviting their friends for dinner at a nice restaurant - although their parents do not make much money. It is wrong to stimulate irrational consumption that they cannot afford," Liu said.

Some online lending platforms have offered loans to college students at unusually high interest rates or engaged in abusive debt collection practices.

To protect students' legitimate rights and interests, the CBIRC, the Ministry of Education, and the Ministry of Human Resources and Social Security jointly suspended online lending platforms from offering new loans to college students, and demanded the platforms prepare to withdraw from their existing student loan business.

Meanwhile, the authorities have also encouraged banks to develop financial products to meet college students' reasonable needs.