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May 25, 2017

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Foiling sharks in the pool of student loans

EIGHTEEN years after Chinese banks stopped issuing credit cards and standard consumer loans to students because they were considered too risky, two state-owned banks have resumed campus consumer lending.

China Construction Bank, and Bank of China, the country’s second and fourth-largest banks, have initiated new consumer loans tailored for university students. China Construction is extending loans of up to 50,000 yuan (US$7,257) at an annual interest of 5.6 percent, while Bank of China has set a limit of 8,000 yuan, with rates at 5 percent.

The government has sanctioned the resumption as a foil for shady online lenders. Shanghai Daily earlier reported that some middlemen operating in online lending platforms such as Jiedaibao set “debt traps” that cost students weekly interest rates of up to 30 percent. Other platforms even required students to submit nude selfies as collateral for loans.

The new lending, said to be on a trial basis and aimed at helping students with living expenses, will involve both banks working with universities to ensure the creditworthiness of borrowers. China Construction will link up with colleges and universities in the southern city of Guangzhou, while Bank of China will be cooperating with Central China Normal University in the city of Wuhan, according to internal file seen by Shanghai Daily.

The new lending is different from student loans for tuition fees, which fall under the supervision of the Ministry of Education. The newly launched products are designed as consumer credit, typically called “campus loans” by market players who have been catering to the desire of students to buy things like smartphones and fashion items.

The renewed involvement of state-owned banks is expected to cleanse the campus loan market, which has been controlled by private loan sharks charging exorbitant interest rates and deploying pernicious tactics in debt collection.

“This draws a sharp contrast because state-owned banks are cautious by nature,” said Xue Hongyan, a senior analyst of Internet finance at the Suning Institute of Finance. “It’s part of the government’s efforts to tighten control over financial risk and market misbehavior.”

Students who turned to dodgy online financing platforms often faced serious harassment when their loans went sour, with menacing, unregulated debt collectors knocking on their doors. There have been media reports of students committing suicide over their dire financial situations.

Notably, the resumption of student consumer loans came just weeks after Guo Shuqing, the new head of the China Banking Regulatory Commission, voiced concern about unregulated online campus credit.

“There is nothing necessarily wrong with students wanting loans to buy gadgets,” Caixin quoted Guo as telling an internal meeting on April 21. “Commercial banks should study how to open the front gate of Internet finance services to universities and students, while at the same time tightening the risk control of credit issued online.”

The cleanup started even before Guo’s remarks. By the end of February, the number of platforms still doing online financial business aimed at campuses dropped to 74 from a peak of 121. Most of the dubious lenders retreated from the business in 2016, according to Online Lending House, a portal site that tracks the sector.

The regulator also implemented a ban on online lenders extending loans to students under the age of 18, according to one of its files released in April.

Compared with the somewhat harsh regulatory shutdown of credit card businesses on campus in 2009, analysts said the student consumption market was simply too large to close. It was better, they said, to create legitimate, regulated channels to serve it.

More than 60 percent of Chinese university students were borrowing money from online lenders to shop or travel, according to a survey last year by the China University Media Union. Student consumption jumped 71 percent to 685 billion yuan in 2016, according to a report released by Campus Marketing Alliance of China.

Still, there are some concerns the new policy doesn’t adequately address the risk of students defaulting on loans.

Bank of China and China Construction didn’t reply to Shanghai Daily’s request for comment, but insiders at commercial banks tended to downplay the magnitude of student loan risk.

Unlike unregulated platforms that don’t have the access to the credit-ratings system, banks can compile a credit history on personal student accounts and make young borrowers aware of how a bad credit rating may affect their future lives. By cross-checking the ratings system, banks can also weed out borrowers unlikely to repay loans.

“The new projects have been sanctioned by the regulator as a matter of social responsibility,” said Wang Haimei, analyst at Online Lending House. “Banks will have stricter management over entry criteria, loan use and sources of repayment in order to prevent students from abusing those loans and to encourage responsible spending.”


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