A raft of online lending companies targeting students in China are seeking business transformation after the China Banking Regulatory Commission (CBRC) highlighted the student lending market as a key target in an industry overhaul aimed at wiping out illegally operated online peer-to-peer (P2P) lending platforms and scheduled to be completed in January 2017.
In the recent three years, numerous student lending apps have come to the fore, through which tens of millions of university students without credit worthiness or parental approval buy things with installment payment at annualized interest rates typically above 10 percent.
The unregulated lending process has led to numerous stories of students failing to pay off their debts. In one case, a female college student was required to send nude selfies to a loan shark on Jiedaibao, an online P2P lending platform in China, to borrow money at a weekly interest rate of 30 percent, hitting the headlines of social media and triggering public debates.
Student lending apps became popular after the CBRC asked banks to halt issuing credit cards to students under the age of 18 in 2009 following a wave of overdraft events, which had added to banks' bad loans. According to a report released in January by the Beijing-based market research firm Analysys, 67 percent of university students surveyed preferred to choose installment payment for purchases.
Last week, Wolaidai, a mobile lending platform established in 2013 in Hong Kong, announced its decision to suspend student-targeted lending business due to stricter regulatory scrutiny. Wolaidai's exit came after the installment payment e-commerce company Qufenqi, a market leader in China backed by Alibaba Group's Ant Financial, stopped marketing campaigns on university campuses in September.
At the same time, China's Ministry of Education, together with the CBRC, has so far released two circulars in which the ministry urged universities and colleges to direct students to form a "diligent and thrifty habit" and to timely correct their "cacodoxy of premature and excessive consumption". The circulars also asked universities and colleges to try every effort to avoid risks brought by the online student lending platforms.
Sound credit system for a sizeable market
"The circulars of the Ministry of Education will have a negative impact on the marketing and advertizing activities of the online student lending platforms," said Zhang Yexia, a senior researcher with the Shanghai-based P2P consulting firm Yingcan Group.
But she emphasized that the regulatory measures do not herald the death of the online student lending industry, saying that the borrowing demands of students remain massive and that the circulars are just confined to self-discipline. "It will depend on how the online student lending platforms are operated under the regulations," added the researcher.
As of the end of 2015, China has 37 million university students, a huge number that is expected to create a $15 billion market for student lending, according to Analysys.
Because of the rules limiting offline marketing and advertizing campaigns, the online student lending platforms will have to make profit through online operation, which will test their risk control ability, noted Zhang.
Industry analysts have criticized problematic online student-targeted lending platforms for falling short of a set of vetting procedures that traditional banks have, leading to the emergence of bad loans and illicit retrieval of debts.
An official from Wolaidai revealed to the Beijing Business Today on the condition of anonymity that the online lending company will put more focus on the blue-collar segment already coveted by a number of online lending giants including traditional banks, licensed consumer finance firms and large Internet groups with financial affiliates, amid the government's crackdown on the student lending market.
Li Zichuan, a senior analyst of Analysys, expressed his concerns over the big challenges the student lending platforms are facing in the blue-collar segment, saying that the online lending platforms serving students will not survive unless they attach more importance to the programs of educational assistance and career guidance.
Additionally, unlike the issuance of credit cards to students which need parental signatures, lending to students by online platforms does not require any parental endorsement, which has increased the urgency of setting up a unified credit evaluation mechanism in the student-targeted online lending system.
Xiao Wenjie, chief executive officer of Fenqile, a leading student micro-loan startup in China, said in an interview that his company kept a bad-loan ratio of 0.67 percent as of July, which was lower than the 1.81 percent of China's commercial banks in the second quarter, helped by big data tracing its borrowers' purchase history and location.
However, there are concerns that many online lending platforms play the role of money lender, which goes against an industry regulation rolled out earlier this year categorizing P2P platforms as the intermediary agencies that can only provide services including information collection and exchange, credit assessment and matching lenders and borrowers.