(Yicai Global) June 4 -- Ant Group has received the go-ahead from China’s banking authorities to set up a consumer finance subsidiary that will run its highly lucrative online lending business. This is a major step in the overhauling of the fintech giant’s business practices after regulators moved in to curb the scope of operations of small loan platforms at the end of last year, scuttling Ant’s planned mega-initial public offering.

Chongqing Ant Consumer Finance will take over Ant’s Huabei and Jiebie micro-loan arms, which have extended more than CNY1.5 trillion (USD234.3 billion) in credit, and will function more like a traditional bank with strong government oversight as opposed to the previous largely unregulated e-model.

Hangzhou-based Ant will pump CNY4 billion (USD620 million) into the new entity to take a 50 percent stake, the China Banking and Insurance Regulatory Commission said yesterday. State-owned finance institutions Nanyang Commercial Bank and China Huarong Asset Management will hold a combined 20 percent.

Other shareholders include Taiwan’s Cathay United Bank with 10 percent equity, electric car battery manufacturer Contemporary Amperex Technology with 8 percent, smart infrastructure developer China Transinfo Technology with 7.01 percent and medical device maker Yuyue Medical Equipment and Supply with the remaining 4.99 percent, the regulator said.

Huang Hao, president of Ant’s digital finance business group, will head the new subsidiary and Chen Huaisheng, chief of Jiebei, will be general manager.

Meanwhile, Chongqing Ant Shangcheng Micro Loan, operator of Jiebei, and Chongqing Ant Small and Micro Loan, operator of Huabei, will be phased out and exit the market within one year, financial news site Caijing reported, citing a CBIRC official.

Clipped Wings

But Ant’s freewheeling ways will now be a thing of the past. Last November, the watchdog drafted a new set of rules to “bring online financial activities under full supervision" as a number of dominant platforms overstepped the mark, offering services for which they did not hold the necessary licenses.

Consumer finance companies are only allowed to lend out just over 10 times their capital. With a registered capital of CNY8 billion (USD1.2 billion), the new entity will only be able to extend a maximum of CNY100 billion in credit.

This is far from enough, Caijing reported, citing Sun Haibo, director of the Institute of Financial Regulation. There is a good chance that a capital injection will be needed before the end of the year, he added.

In addition from now on, Ant must cough up at least 30 percent of the capital of each loan. The rest can come from a bank or other lender.

In a bid to protect consumers, the loan ceiling has been set at one third of the borrower’s average annual income over the last three years and must not exceed CNY300,000 (USD46,800). And student loans are strictly off-limits.

This ensures that individuals’ line of credit is not excessive and can be repaid, Zeng Gang, deputy director-general of the National Institution for Finance & Development, said earlier. Some lenders target students and other people who have no source of income, he added.

Editor: Kim Taylor