Chinese banks have lowered rates and boosted the amounts they will lend to consumers, even though there has been a surge in defaults, as Beijing turns to credit to help boost domestic consumption hit by the coronavirus.
More than a dozen state-owned lenders have started offering promotions, such as halving borrowing costs and doubling the amount consumers are allowed to borrow, since the banking regulator relaxed credit controls last month.
An official at the risk management department of a major bank said lenders were participating even if they knew that some loans were unlikely to be repaid. “We have to take part in the operation because the government wants to support the real economy with cheap credit,” said the official, adding: “These loans may go under if the economy continues to weaken.”
Official data show that retail sales — an important growth engine for the economy — fell a record 21 per cent in the first two months of this year from a year earlier. Meanwhile, multiple local banks told the FT their overdue personal loan ratio had surged by as much as 60 per cent from January, when the disease broke out.
Although Beijing is hoping the move will help get the economy back on track, analysts warned that the state-led consumer credit boom was more likely simply to drive up the number of bad loans because subprime borrowers would begin to flood in.
“How could demand for consumer loans hold up when cars sales collapse and tourism spending plummets,” said Ji Shaofeng, a former banking regulator. “The main reason for people to borrow right now is to pay off debt and those borrowers are likely to default in an economic downturn.”
Chinese consumers trimmed short-term borrowing by a record Rmb450bn ($64bn) in February, according to the People’s Bank of China — the measures to boost consumer borrowing only came into effect towards the end of February.
Despite analysts’ doubts, Beijing sees personal loans as a solution to economic woes. Ye Yanfei, an official at the China Banking and Insurance Regulatory Commission, said at a press conference on Sunday the government would “count on” consumer credit to help consumption recover.
The new stance marks a sharp contrast from a few months ago, when the regulator put consumer loans under tighter scrutiny to reduce credit risks.
Lenders have been quick to pick up the signalled change in policy. Industry leaders such as the Industrial and Commercial Bank of China have cut consumer loan rates to as low as 4.4 per cent from more than 6 per cent at the end of last year. The bank has also increased the amount that clients can borrow by up to a third.
Smaller banks are going further. Shanghai Rural Commercial Bank has reduced its lending rate to 3.6 per cent a year for a consumer loan product. That compares with the benchmark one-year lending rate of 4.35 per cent.
“Credit demand has vanished following the outbreak of the coronavirus,” said an official at SRCB. “The best way to bring it back is by offering better terms.”
The lending campaign, however, has raised concerns about credit risks because defaults have also taken off. Zhou Lifeng, chief risk officer at Hangzhou-based Sunyard Fintech, a consultancy that advises banks on risk management, said his clients had seen an increase of between 20 per cent and 50 per cent in non-performing consumer loans since the disease emerged.
“The virus has given a huge boost to overdue loans because many people have lost their jobs and are unable to repay debt,” said Mr Zhou.
Additional reporting by Xinning Liu
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