CCWE of Tsinghua University Releases China's First Research Report on Consumer Finance

2015-11-02

Beijing Oct 27 – CCWE of Tsinghua University held the 2015 China Consumer Finance Forum in Beijing today and released China’s first research report on consumer finance, titled "A Study of China’s Consumer Credit Market." With the theme "Standardized Development, Sustainable Innovation," the forum received support from and was widely attended by the regulators, the first batch of consumer finance companies, and the new entrants into the consumer finance market. Among the participants were the representatives of CBRC HQ, the Credit Reference Bureau of PBOC, Bank of Beijing CFC, Bank of China CFC, Home Credit CFC, Suning CFC and other consumer finance companies, plus Professor LI Daokui from Tsinghua University. Each participant either delivered a speech or joined the roundtable discussion.

"A Study of China’s Consumer Credit Market," China’s first comprehensive research report on consumer finance, was completed by CCWE of Tsinghua University under the leadership of Professor LI Daokui. From 2014 to 2015, the Center surveyed 114 consumer credit providers of different types from 40 cities covering 23 provinces through questionnaires or field visits. The study objects included commercial banks, consumer credit providers, small loan companies, intermediaries, and internet finance companies. The report is an empirical study of the correlations between consumer credit and the structural transformation China is undergoing. It examines the status quo of China’s consumer credit market as well as the trend of its future development. In addition, rankings of responsible consumer credit providers are released and successful business models from the consumer finance industry are summarized.

Since the reform and opening up, the growth of China’s consumer credit market has gained momentum. Nevertheless, compared with developed countries,  the level of its development is still rather low. The structure of consumer credit is not ideal as well. The expansion of consumer credit can ease liquidity constraints, improve the spending pattern of our citizens, expand the scale of the industry and stimulate demand. Against the background of China’s economy entering the "new normal," especially when its growth is slowing down, consumer credit will certainly gradually become a new engine to drive economic growth. It is pointed out in the report that the development of consumer credit and the structural transformation of China’s economy are aligned in terms of the overall trend, and the former can speed up the pace of the latter. 

As a major player in the consumer credit market and the supplier of consumer credit funds, consumer credit providers play a critical role. The report states that a qualified and responsible consumer credit provider has three characteristics: profitability, normalization, and inclusion.

Profitability refers to the commercial basis on which the sustainable development of the consumer credit provider relies. According to the report, those consumer finance companies under the supervision of CBRC all reach the average of the financial industry in terms of profit-making capacity. 

Normalization refers to whether the service of the consumer credit provider is transparent, convenient, and efficient as per regulatory rules. The researchers have designed 8 parameters for measurement - incorporation into the credit reference system (weight value: 20%), the administrative level of the regulator (weight value: 20%), notification of penalty for overdue payment (weight value: 20%), audit by a third party (weight value: 15%), number of repayment channels (weight value: 10%), an informative official website (weight value: 5%), a 24-hour customer service center (weight value: 5%), and SMS reminder service (weight value: 5%). As the Normalization Ranking shows, Bank of China CFC, Bank of Beijing CFC, and Home Credit CFC get full marks, indicating that they are fully in compliance with regulations.

Inclusion is further divided into two components in the report, namely “inclusiveness” and “pricing.” A total of 7 parameters have been used to measure the degree of ease/difficulty in obtaining a consumer loan, which is defined as “inclusiveness.” They are income requirement for the borrower (weight value: 25%), occupation requirement for the borrower  (weight value: 5%), average loan scale (weight value: 25%), loan approval rate (weight value: 15%), the requirement of a fixed-line for the borrower, maximum tenor (weight value: 15%), and approval rate (weight value: 10%).

Among the sampled companies, Home Credit CFC and JD IOU rank first and second on the Inclusiveness Ranking. Of the 114 samples, only 8 manage to go above the borderline of 60 points when it comes to "inclusiveness," 23 are between 59 and 40 points. The majority of the samples are less than 40 points.

What is noticeable is that loan scale is an important parameter in measuring the inclusiveness of the consumer credit provider. Consumer finance companies offer a significantly lower amount on average than the other types of companies. This demonstrates the inclusiveness of the service of consumer finance companies. Take Home Credit for example. The average amount of a Home Credit CFC loan is around CNY 3,400.

As regards the value of "benefits to consumers," a total of 10 parameters have been used to measure the price at which the consumer obtains a loan. They are monthly interest rate (weight value: 25%), monthly service fee (weight value: 25%), monthly rate of default penalty (weight value: 20%), possibility of extension of repayment, detailed explanation of the fees (weight value: 5%), a public platform for fee inquiry (weight value: 5%), cap for late fee (weight value: 5%), remedy measures under special circumstances (weight value: 5%), a cooling-off period (weight value: 5%) and provision of insurance by a third party (weight value: 5%). Among the sampled companies, Bank of China CFC, Bank of Beijing CFC, and JD IOU rank first, second, and third respectively in terms of "pricing." 49 of the 114 samples companies fall above the borderline. 

The overall ranking is based on "normalization," "inclusiveness," and "pricing." Bank of China CFC ranks with 93 points atop the final list, followed by Home Credit CFC (92 points) and Bank of Beijing CFC (90 points) in second and third place, respectively.

As the initiator of the report, Director LI Daokui of CCWE of Tsinghua University said that China’s economy is at a critical stage of transformation and that the development of consumer finance can boost domestic demand effectively. Currently, there is a huge gap between the scale of consumer credit in China and economic aggregate. China’s consumer credit market will maintain positive growth in the future. He hopes that this report will provide regulators, consumer credit providers, and consumers with valuable ideas and suggestions and encourage the consumer finance industry to achieve well-planned development as well as continuous innovation.

The researchers have also studied typical companies. First of all, take  Bank of China CFC as an example of the type of company with origins going back to banks. They take advantage of the influence of their parent company – Bank of China – to rapidly expand business. At the same time they use the experience from developed consumer finance markets for their benefit, conduct business through retail channels, and cooperate with many shop owners as well as businesses. Unlike banks, which tend to target mid-to-high-end customers, Bank of China CFC categorizes their target customers into two groups: “small new customers” and “big new customers”. In spite of a relatively small amount and a relatively high interest rate, their loans can bring convenience to mid-to-low end consumers, as monthly repayment is rather affordable, leading to a more efficient use of money and fast and simple service.

Another example of the above-mentioned category of consumer finance companies is Bank of Beijing CFC. They have analyzed the consumer credit environment and target customer groups, taking into account the features of consumer finance and their own strength, and launched a variety of products aimed at different groups of customers. Bank of Beijing CFC has extended its reach into various sectors in the wake of the shareholding restructure. Personal consumer credit products offered by banks come with complicated application formalities and relatively high entry barriers. In contrast, their service is fast and simple and their products are rich in variety. They cooperate with multiple parties and help disadvantaged groups. At the same time, they try to innovate on the basis of Internet finance and develop online lending platforms.

In addition, as the only foreign-invested consumer finance company in China, Home Credit CFC, has steadfastly followed the principle of financial inclusion, firmly committed itself to safe and responsible lending, combined international experience with local market realities, achieved “localized” business operations, and dedicated itself to the cultivation of China’s consumer finance market. Home Credit provides mid-to-low income groups and grassroots consumers with a clear and transparent consumer lending service. Their average monthly income is between RMB 3,000 and RMB 4,000. Most of them are first-time borrowers with no or limited credit records, which makes it difficult for them to obtain a loan from banks.