Ant Financial, the financial arm of Alibaba, has barred consumer loans with an annual interest rate above 24% on its Alipay platform. This latest step by Alibaba’s Ant Financial is another sign of how stricter regulations are chaining the once-booming Chinese internet lending industry.
Why did Alibaba’s Ant Financial adopt new rules?
Ant Financial stated that it has increased monitoring of the financial service providers on Alipay and its credit platform, Sesame Credit, and found some inappropriate collection methods and interest rates above legal limits, according to Reuters. Further, Alibaba’s Ant Financial stated that it would withdraw cooperation with some cash loan providers. Sesame Credit is a proprietary credit scoring system, which gives Alipay e-wallet users a credit score.
“Our inspections discovered that products recommended by a few merchants on Lifestyle have problems such as interest rates that exceed the legal limit and inappropriate collection methods,” Ant Financial said in a statement, according to Financial Times.
Ant Financial’s latest move comes after the People’s Bank of China and China Banking regulatory commission decided to tighten the regulations and rectification of online micro loans. The government has already furnished the notice asking provincial authorities to withdraw the regulatory approval for new internet micro-loan companies and stop companies that do not meet the criteria from offering loans.
Companies offering small loans over the internet have been mushrooming over the past year in China due to weak regulations. Online loans have become quite a trend among people in China, who are looking for quick finances. The formalities that these lenders ask is less complicated compared to those required by banks in China. Further, these lenders require less paperwork and rely on the personal credit scores generated through Alipay.
However, online loan providers, especially those who specialize in peer-to-peer lending, are known for aggressive collection tactics, high interest rates and loosely holding the personal information. These are the main reasons why the political consensus is turning against online lending.
Protecting students from online lenders
The government’s decision to push tougher rules, will also weigh on Qudian, the Chinese online lender backed by Alibaba and Ant Financial. The U.S. listed Qudian, which turned profitable in 2016 and mainly caters to college students and young workers, offers financing for purchases such as smartphones, laptops and consumer electronic gadgets on a monthly installment basis. Stocks of service providers such as the China Commercial Credit, Jianpu Technology and China Rapid Finance witnessed a dip upon news of tightening regulations by the Chinese government.
Earlier in May, the country banned the online loan providers from targeting students. The authorities allowed only a handful of banks to offer loans to students. With the move, the government tried to address one of the most problematic areas of online financing, wherein the students found themselves trapped paying very high interest rates for fancy purchases such as smartphones.
The move came after several tragic suicides of young people, who were troubled by debt collectors, and a case where a girl submitted nude photos to the lenders as collateral. In 2009, the government warned the credit card companies against targeting students, notes the South China Morning Post.