New doors opening for consumer finance firms

The consumer finance sector is to be opened to non-financial enterprises as a move to draw more private capital into the industry, according to the China Banking Regulatory Commission.

Non-financial enterprises with at least 30 billion yuan ($4.9 billion) in annual operating income can set up a consumer finance company and act as the main sponsor, the CBRC said in a draft released for comment on Thursday night.

The threshold for operating income is far below the former level of 80 billion yuan.

These consumer finance companies must attract strategic investors who have experience in management and risk control related to consumer loans, the draft said.

The CBRC lowered the minimum stake for the main sponsor from 50 percent to 30 percent to diversify the shareholders.

The revised policy is in line with China's economic reforms as it shifts from an export- and investment-driven model to one that emphasizes consumption, said Zhao Xijun, head of the Financial and Securities Institute of Renmin University of China.

"Reform requires a reallocation of resources," said Zhao. "It is an effective means to ease requirements for private capital to invest in the financial industry."

The CBRC also lifted regional restrictions on consumer lenders, allowing them to establish outlets in other administrative regions to achieve economies of scale.

Ten cities including Shenyang, Nanjing, Hangzhou and Chongqing have been added to the list of places that may conduct pilot programs. The total number of pilot cities now stands at 16, including the first four approved in 2010.

Moreover, qualified financial institutions in Hong Kong and Macao may establish consumer finance companies in Guangdong province.

The draft also stipulates that consumer finance companies may accept deposits held by subsidiaries of the shareholding companies and the stakeholders themselves, further expanding the financial resources available to the companies.

These small lenders have been hampered by costly, limited financing channels such as borrowing among themselves or on the interbank market, or issuing bonds.

Consumer finance companies run lower risks than banks since they provide small loans to consumers. At the same time, they are a drive for the domestic spending that China urgently needs, said Wu Xiaoqiu, a finance professor at Renmin University,