Ping An Securities: Implementation of Regulations on Small Loan Company Management, Strict Supervision Trend Continues

Ping An Securities released a research report stating that with the implementation of refined supervision, top institutions may benefit more. The introduction of the "Measures" is conducive to improving the risk control system of small loan companies, guiding the industry to enhance risk management and compliance operating levels, and better serving the development of the real economy with the positioning of "small and dispersed". Looking ahead, top institutions with more sophisticated risk control systems and a more stable customer base may benefit more. Event: Recently, the China Banking and Insurance Regulatory Commission issued the "Interim Measures for the Supervision and Management of Small Loan Companies" (hereinafter referred to as the "Measures"). Key viewpoints of Ping An Securities are as follows: Strict business scope, clear operating and regulatory principles The "Measures" stipulate that the business scope of small loan companies is limited to: (1) issuing small loans; (2) accepting and discounting commercial drafts; (3) other businesses stipulated by laws, regulations, and approved by the China Banking and Insurance Regulatory Commission, while strictly prohibiting illegal "channel" businesses such as renting out licenses. From a regulatory perspective, it is stipulated that the provincial-level local financial management institutions are responsible for supervising and managing local small loan companies and handling risks. The establishment of small loan companies must be approved by the provincial-level local financial management institutions. In terms of operating areas, small loan companies are not allowed to operate across provinces, autonomous regions, or municipalities directly under the central government, and the operating areas of online small loan companies are separately stipulated. Clarifying the single loan limit, emphasizing the characteristics of small and dispersed The "Measures" further clarify the loan limits, with changes compared to the "Interim Measures for the Management of Online Small Loan Business (Draft for Solicitation of Comments)" from 2020. For example, online small loan companies are now required not to exceed RMB 200,000 for loans used for consumption, or not to exceed 1/3 of the borrower's average annual income over the past three years, with the lower amount being the maximum loan amount, changed from the previous RMB 300,000 limit. For loans used for business operations, the limit has changed from RMB 1 million to not exceeding RMB 10 million for the balance of loans to legal entities or other organizations and their affiliates. In terms of loan concentration, the "Measures" require small loan companies not to exceed 10% of the net assets at the end of the previous year for all loans to the same borrower and not to exceed 15% for all loans to the same borrower and its affiliates, emphasizing the characteristics of diversification. For joint loan funding models, the "Measures" require a minimum contribution of 30% for joint loans issued with commercial banks. Refining financing requirements, clarifying loan classification From the perspective of financing requirements, the "Measures" strictly regulate the "1+4" leverage ratio indicator. On one hand, the balance of funds raised by small loan companies through non-standardized forms such as bank loans and shareholder loans must not exceed 1 times their net assets at the end of the previous year. On the other hand, the balance of funds raised by small loan companies through standardized forms such as issuing bonds and asset securitization products must not exceed 4 times their net assets at the end of the previous year. Institutions with ample paid-in capital are expected to maintain competitiveness in the future. From a risk perspective, the "Measures" for the first time divide loans overdue for more than 90 days into non-performing loans. They also stipulate that all lending funds must enter dedicated lending accounts, and all loan disbursements and interest repayments must go through these accounts. Strict loan classification and fund flow management requirements are conducive to the healthy development of the industry. Risk reminders: (1) Policy advancement is below expectations; (2) Macroeconomic downturn exceeds expectations; (3) Increased competition dragging down corporate profits.