(Yicai Global) Dec. 29 -- WeBank’s finances are in a good state despite being a lender to flailing long-term apartment rental platform Danke Apartment, the chairman of China’s first private and online-only bank told Yicai Global in an exclusive interview.

WeBank, which is backed by internet behemoth Tencent Holdings, is on track for a healthy 2020 financial year, Gu Min said. It has recorded a steady growth in profit, a low non-performing loan rate and has sufficient provision in its ‘innovative business portfolio,’ which includes rental loans, to cover any possible losses.

The proportion of risk assets lent to Danke is not large, Gu said, adding that most of the Shenzhen-based company’s business is in mature products.

WeBank became embroiled in Danke’s financial woes as a provider of rental loans. Rental loans allow lodgers to apply for a bank loan worth a whole year’s rent on signing a long-term apartment lease with realtors such as Danke. The bank will pay the funds to the realtor, who will then reimburse the landlords and the tenant repays the bank in monthly installments.

This operating model allowed companies like Danke, 70 percent of whose tenants use such loans, to not only take a large cut from the actual rent charged, but to also collect a huge amount in prepayments to fund rapid expansion. However, it can become very risky when there are not enough new renters to keep up capital flow.

While Danke has been growing at a rapid rate, with a 46.8 percent jump year on year in its portfolio to 419,000 apartments this year, so have its debts. It racked up losses of CNY3.43 billion (USD522.6 million) in 2019 with a debt-to-asset ratio of 95.78 percent. Last month operator Phoenix Tree Holdings was not even able to pay its staff wages.

Fearing bankruptcy looms, a number of landlords asked to terminate their contracts early. This resulted in a number of tenants being turfed out of their lodgings prematurely but still under contractual obligation to pay their rents monthly, leading to a public outcry.

WeBank, which had extended 161,845 loans to tenants of Beijing-based Danke as of Dec. 1, has not effectively managed the risks in the rental loan model and as such must also bear some responsibility, according to public opinion.

As a result, WeBank has been trying to find a solution. On Dec. 4, it announced it will write off all outstanding loans from tenants and instead transfer the amount due to beleaguered Danke.

Excerpts of the interview are given below.

Yicai Global: How many customer loans have been settled under this scheme?

Gu Min: A total of 136,100 loans had been settled as of Dec. 27, amounting to CNY1.3 billion (USD199 million), 86 percent of the total.

YG: You mentioned that you have "reflected" a lot recently. Can you share your thoughts with us?

GM: Yes. When I look back, I think our initial intentions were good, but there were indeed some problems with the implementation.

When we designed the rental loan product, the idea was that customers would not pay interest, but rather Danke will pay, so as to reduce pressure on young people.

We have extended rental loans to around 600,000 customers. There were 160,000 loans still outstanding when Danke’s financial crisis broke out. Strictly speaking, three quarters of our customers have made use of rental loans without any problems.

We conducted full risk control considerations regarding the rental loan product. And we chose Danke as a partner as it was a leading company in the long-term apartment rental sector and a listed company with a good shareholder background.

As a business model, we believed that rental rates and rental prices could be adjusted in tandem. For example, when occupancy rates fall, rents can be lowered. However, Covid-19 made both occupancy rates and rents drop sharply at the same time, something that was not expected. It would not occur under normal circumstances, but then Covid-19 happened.

YG: WeBank has been exploring financial scenarios and driving demand through scenarios over the past few years. Will your strategy change after this incident?

GM: In fact, most daily financial needs are related to scenarios, especially large financial needs, so we cannot demonize financial scenarios because of the risks posed by individual companies.

Our future model should be more one of using financial or banking services to assist the orderly development of scenarios, and not letting scenarios dominate the development direction of the entire business.

Editor: Kim Taylor