(Yicai Global) Nov. 3 -- Ant Group, China’s largest online provider of microfinance services, faces having its wings clipped as regulators release a new set of draft regulations to curb the scope of operations of online small loan lenders.

Microfinance was the fintech giant’s biggest earner in the first half. Available on the firm’s third-party payment platform Alipay and other sites, it contributed nearly 40 percent of revenue, some CNY28.6 billion (USD4.3 billion), compared with just over 35 percent from its mobile payments business.

The new rules could significantly affect the bankability of the Hangzhou-based firm, which has over CNY2 trillion (USD299 billion) in outstanding credit, as it gears up for a world record-breaking dual-listing on the Shanghai and Hong Kong stock exchanges later this week.

Regulators are keen to make sure that Ant is prepared to toe the line, especially as co-founder Jack Ma last month questioned if the direction of some of the country’s financial regulatory policies was ‘right’ for China.

Ant’s Ma, Chairman Eric Jing and President Simon Hu were hauled before officials from the People’s Bank of China, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission and the State Administration of Foreign Exchange for talks yesterday.

Ant will follow the guidelines laid out at the meeting, it said afterwards. The company will embrace stable innovation, supervision, service to the real economy and openness for mutual benefit, it said.

New Rules

China should not only encourage innovation and promote entrepreneurship, but also strengthen oversight to bring financial activities under full supervision in accordance with the law and effectively guard against risks, the Financial Stability and Development Committee of the State Council, the country’s cabinet, said at a special session held on Oct. 31.

Online small loans, which use Big Data, cloud computing and other internet-based means to evaluate the credit risk of borrowers, determine the type of loans they are eligible for and complete the entire borrowing procedure online, have been moved to the jurisdiction of the China Banking Regulatory Commission, Zeng Gang, deputy director-general of the National Institution for Finance & Development, told Yicai Global. They were arbitrated previously by local authorities.

In the set of draft regulations released yesterday, borrowing limits are to be fixed at no more than one third of the borrower’s annual income, lenders must stump up a bigger proportion of each loan, and multi-regional lending is to be barred.

The new rules treat businesses and consumers equally, so as to avoid regulatory arbitrage and unfair regulation, Zeng said.

Lower Loan Ceiling

The loan ceiling is to be set at one third of the borrower’s average annual income over the last three years and should not exceed CNY300,000 (USD44,840).

This clause aims to protect consumers, Zeng said, adding that it ensures that personal credit lines are not excessive and can be repaid. “Some lenders target students and other people who have no source of income,” he said.

“Considering that most online small loans are used for individual credit loans, the draft aims to prevent excessive personal debts and establish a de-facto system of qualified borrowers," Chen Wen, director of the Research Center for Digital Economy at the Southwestern University of Finance and Economics' School of Finance, told Yicai Global.

Raising Leverage Requirements

Issuers of micro loans must contribute at least 30 percent of the capital of each loan jointly issued with a bank or other lender, according to the draft regulations.

Small loan firms may not borrow more than five times the value of their net assets. The amount leveraged through bank and shareholder loans must not be more than one time the size of its net assets, and the amount raised through bond issuance and other security products cannot exceed four times its net assets.

Raising the ratio to 30 percent serves two purposes, Chen said. First, it prevents increasing the amount of a single loan by merging several small online loans. Second, it prevents the transfer of credit risks to banks and consumer finance agencies.

The new ruling will significantly hinder the operations of many small lenders, which will have to expand their capital base should they wish to maintain their existing business scale. Ant, for instance, has not disclosed how much it contributes to each joint loan it extends.

The firm has said that 98 percent of its loans are contributed by bank partners and by raising proceeds through asset securitization. Ant's two units that run the small loan business, Chongqing Ant Business Small Loans and Chongqing Ant Micro and Small Loans, have registered capital of just CNY12 billion (USD1.8 billion) and CNY4 billion.

Restricted Area of Operation

Small loan firms are to be restricted to conducting business in the province where they are registered and may not operate in other areas without approval from the CBIRC.

The majority of online lenders offer their services to many regions, and this new ruling will greatly affect them and might even impact the value of their business licenses, Zeng said.

The central bank’s new rules means that these companies will need to clear their inventory of non-compliant assets within the transition period of three years should they fail to win approval to operate across multiple regions, he added.

Editors: Liao Shumin, Kim Taylor