Increased Chinese scrutiny increases investment risk of ‘Beast’ Ant

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As Ant Group was pushing forward in August towards its IPO, at least two smaller Chinese banks using existing ties to the FinTech player decided to stop sourcing fresh customer loans from it, people with knowledge of the issue said.

Their moves came after regulators scrutinised banks that used Ant’s technology stage excessively for underwriting consumer loans in a time when worries about defaults and lenders’ asset quality grew in a pandemic-hit economy, said the people.

For its lending business, Ant Group originates demand from retail consumers and small businesses and passes that on to about 100 banks for underwriting, earning fees from the lenders and putting its own balance sheet at minimum risk.

“The ‘catch me if you can’ type of match between authorities and Ant will be there,” said Dong Ximiao, chief analyst at the Zhongguancun Internet Finance Institute, a think tank backed by Beijing’s Haidian district government.

“But the trend of tight regulations won’t go backwards for sure,” Dong said.

“Regulators are now well conscious of how harmful it would be to set free a beast like Ant.”

With its unique business model and the absence of peers in China and elsewhere, analysts say Ant has mainly thrived as a technology platform away from banking sector’s regulations despite its bouquet of financial offerings.

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Even in the run up to the IPO the company tried to burnish its tech credentials – it changed its name to Ant Group from Ant Financial – and is pushing brokerages to get tech analysts to cover the firm, two separate sources said.

However, regulators are becoming increasingly worried about banks’ insufficient risk controls to the consumer loans business and also their excessive reliance on external tech platforms like Ant to tap clients.

This year, the top courtroom have introduced new rules, such as placing a cap on interest rates that tech platforms may charge to their own financing, to standardise practices and protect bank balance sheets.

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The choice of two smaller banks to quit bringing in new consumer loan business via Ant came after the PBOC kicked a poll in July to look into the bad loan ratio of banks’ such co-lending business, said the people.

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The people, who received the PBOC guidance and have direct knowledge of the banks’ actions, declined to be named and did not want the creditors’ names to be mentioned as they were not authorised to speak to the media.

Ant, an affiliate of e-commerce giant Alibaba, said the information about the action taken by the two smaller banks was “unsubstantiated” and that in the past two months the company had tied up with more banking partners.

“Our partner banks handle risk independently and together, we’ve been facilitating consumer loans with risk management functionality and achieved the delinquency rate as low as 2.15% as of July 31, 2020, substantially lower than industry average,” it said.

PBOC did not respond to Reuters request for comment.

Starting as a payments processor in 2004, Ant built an empire by offering its users short-term loans that are credited within minutes and selling insurance and investment products.

Ant is targeting a valuation of about $250 billion or more in its IPO, similar to the market cap of Industrial and Commercial Bank of China, the number one bank by assets globally.

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Adding to the risk for potential investors in Ant, the US State Department has submitted a proposal for the Trump administration to add Ant to a trade blacklist, we reported earlier.

And in an indication of the regulatory challenges ahead at home, Li Wei, PBOC’s technology department head, during an address at a conference organised by Ant last month, warned banks on their reliance on tech platforms.

“No matter the form of financial businesses evolves… financial institutions should never outsource their key licensed financial credentials to others, and all monetary companies should be licensed and under regulations,” Li said.

The team at Platform Executive hope you have enjoyed this news article. Initial reporting via our official content partners at Thomson Reuters. Reporting by Cheng Leng in Beijing and Julie Zhu in Hong Kong. Writing by Sumeet Chatterjee. Editing by Muralikumar Anantharaman.

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