Initiating a Price War in Rates

The landscape of consumer finance is experiencing a seismic shift, characterized by a fierce competition driven by interest rate adjustments between banks and consumer finance companiesAs the consumer spending begins to recover, various banks are seizing the moment referred to as the "golden opportunity" for consumption by deploying enticing strategies like red envelopes, vouchers, and discounts to attract customersThis has triggered a wave of interest rate reductions, bringing rates to unprecedented lows.

In recent years, as the growth of personal housing loans slows down or even descends into negative figures, many commercial banks are pivoting towards consumer loans as a crucial growth avenueThis shift has been facilitated by the lowering of loan interest rates to capture a larger market share; a number of banks have seen their consumer loan rates drop below 4%, with the most competitive banks offering rates around 3%.

Given the competitive edge that banks currently have in terms of consumer loan rates, consumer finance companies, another key player in the sector, are facing substantial challenges in their efforts to sustain business growth.

Surge in Market Share for Bank Consumer Loans

In the context of the government's directive to "focus on expanding domestic demand and enhancing the fundamental role of consumption in economic development," the foundational role of consumption in China has been increasingly reinforced

The share of final consumption expenditure in the nation’s GDP has remained above 50% for the past eleven yearsConsumption has evolved into the primary driving force behind economic growth in China, with upgrades in consumer behavior aligning concurrently with advancements in modern technology and production methods— this is a development that assures continuous growth in the Chinese consumer market.

Currently, the primary institutions involved in consumer finance include banks and consumer finance companiesEach of these entities has its unique positioning based on resource endowments, cost of capital, and level of digital operation, leading to distinct target consumer segments.

Banks, being traditional institutions with capabilities to gather savings, naturally boast lower funding costs alongside a comfortable and extensive customer base

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They can offer very low loan rates, particularly for high-quality usersRecently, banks have intensified collaborations with traffic platforms to enhance customer acquisitionThis lower financing cost makes banks more appealing to these platforms, further constraining the operational space for consumer finance firms.

During a press conference held by the State Council Information Office on July 14, the spokesperson for the People's Bank of China stated that household loans increased by 2.8 trillion yuan in the first half of the year, exceeding the prior year’s total by 572.3 billion yuan, which was primarily attributed to significant gains in personal operational loans and consumer loans.

According to data from the central bank, in the first half of the year, personal operational loans accounted for an increment of 2.3 trillion yuan, a yearly increase of 759.3 billion yuan, while personal short-term consumer loans saw an addition of 300.9 billion yuan, reflecting a staggering climb of 4.019 trillion yuan compared to the year prior.

Since the beginning of the year, the total personal housing loan amount among 42 listed banks has seen a significant reduction of 0.36%, while operational and consumer loans have taken the lead as the primary drivers of personal loan growth within banks.

Specifically, from the 42 listed banks, 37 disclosed their consumer loan balances for the first half of the year, which collectively reached approximately 37.61 trillion yuan—an impressive growth of 27.17% compared to the start of the year, netting more than 8 trillion yuan in new loans

Notably, 21 of these banks reported double-digit growth since the beginning of the year.

Among the significant state-owned banks, the China Construction Bank showcased remarkable growth in personal operational loans, reaching 608.65 billion yuan, which equated to a rise of 46.59% since the beginning of the yearMeanwhile, the bank’s consumer loan balance hit 368.8 billion yuan, marking a 24.83% increaseSimilarly, the Industrial and Commercial Bank reported operational loans of 1.189 trillion yuan, gaining 27.85%, while its consumer loan balance expanded by nearly 12%.

Beyond the large banks, both joint-stock and local banks have seen significant expansions in operational loans and consumer loans traction.

For example, China Merchants Bank's consumer loan balance reached 272.35 billion yuan, reflecting a 34.68% growth, while Chengdu Bank’s operational loans surged by over 33% from the start of the year, with consumer loans skyrocketing to a remarkable growth of 388.06%.

The Onset of the Interest Rate "Price War"

The substantial increase in both consumer and operational loan balances at banks can primarily be attributed to the consistently declining interest rates.

Since the onset of this year, a plethora of banks have ignited a price war on consumer loan rates—some established commercial banks and joint-stock banks have seen their consumer loan interest rates dip to between 3.3% and 4%, with some as low as 3%.

At the same time, a range of promotional offers for consumer loan interest discounts has emerged

For instance, the China Construction Bank has rolled out products with an annualized interest rate as low as 3.5% for premium customers — additionally, participants in this loan offer are provided with opportunities to win gifts like phone credits and red envelopes; Meanwhile, the Bank of Communications offers its “Hui-min Loan” targeting select top-tier client companies a 3.6% interest rate coupon for newly issued loans.

Not only do large-scale banks offer compelling rates, but smaller regional banks also present attractive consumer loan interest rates.

For instance, the Ningbo Bank has introduced its “Dai Yitong” consumer loan product, which promises loans for those who own property, differing from the traditional unsecured loans as it offers loan amounts up to 10 million yuan with rates commencing at 2.98%. Additionally, applicants who engage in a joint application can receive a discount coupon reducing interest by an additional 888 yuan per person.

According to data monitoring conducted by Rong 360 Digital Technology Research Institute, in July, the average interest rate for consumer loans across national banks registered at 3.57%, notably lower by 79 basis points year-over-year

Among national banks, the lowest executing interest rate for consumer loans averaged 3.58%, while joint-stock banks slightly edged out at 3.56%. This marks the first instance where the average consumer loan interest rate of joint-stock banks has dipped below that of state-owned banks.

The continuing decline in consumer loan interest rates throughout the year is influenced by numerous factors.

Firstly, the monetary policy of the People's Bank of China has driven interest rates downwardIn June and August, the central bank conducted open market reverse repos, reducing the bidding rate by a combined 20 and 25 basis points, respectively, which has consistently demonstrated the effectiveness of the LPR reforms by promoting lower financing costs for both enterprises and individual households.

Secondly, as banks have lowered deposit rates, this has allowed for reduced costs on the funding side, facilitating a conducive environment for lowered consumer loan rates

On September 1st, several banks adjusted their RMB deposit rates for specific periods, with maximum reductions reaching up to 25 basis pointsThis marks the second collective adjustment of deposit rates since early June.

Conversely, banks are also motivated to increase their consumer loan portfolios as part of their operational strategiesWith diminishing new housing loans, increasing the proportion of consumer loans helps in improving the overall loan structure.

However, not everyone can enjoy the benefits of these low interest rates.

Banks employ big data analytics to assess various borrower indicators, including employment type, salary levels, repayment capability, and credit history, determining the applicable interest rate.

Take the lightning loan as an example; the eligible customers can avail themselves of a fixed interest rate coupon of 3.6%. However, these coupons are restricted to single-transaction use and require a minimum withdrawal amount of 50,000 yuan.

To qualify for the lightning loan program, applicants must meet three criteria: firstly, they must be holders of a first-class card from the Shanghai branch; secondly, they must successfully establish a credit limit on the lightning loan with a zero balance recorded by December 31, 2022; and lastly, they must meet qualification standards as defined for salary card customers or equivalent to gold card status and above.

The Future of Consumer Finance Companies

While consumers certainly celebrate the dramatic decreases in bank loan interest rates, licensed consumer finance companies find themselves under immense pressure

As bank consumer loan rates enter the "3-era," sustaining current business operations becomes increasingly challenging for licensed consumer finance firms.

In stark contrast to traditional financial institutions like banks, consumer finance companies, which emerged during the internet era, navigate customer acquisition with a variety of approaches, but this flexibility corresponds to increased overall operational costsPositioning themselves within high-risk segments, consumer finance companies lack collateral safeguards, leaving them more susceptible to credit risks than traditional banks.

Data from the semi-annual reports published in 2023 illustrates the contrasting fortunes of consumer finance companies; three firms—Zhaolian Consumer Finance, Mashang Consumer Finance, and Xingye Consumer Finance—collectively achieved nearly 4.5 billion yuan in net profit for the first half of the year, while 11 other consumer finance entities barely surpassed the 100 million yuan mark.

Furthermore, in terms of net profit growth rate, Zhaolian's net profit exhibited year-on-year declines, with several other firms facing double-digit decreases.

In addition to internal cost challenges, a host of consumer-boosting policies recently enacted by banks further intensify market competition against consumer finance companies

With banks keen to tap into new demographics like “new citizens,” there lies an overlap in consumer segments being targetedAs banks offer loans starting at 3%, consumer finance products struggle to maintain their allure.

It has been reported that most consumer finance companies operate under an agency model, frequently tied to high-value cash loans, where agents do not assume repayment responsibilities, resulting in channel risks that exceed those of other modelsIn recent years, during the crackdown on cash loans and governance measures targeting platform enterprises, several non-compliant smaller platforms have been eliminated from the market, compounded by frequent disruptions due to the pandemic, causing many borrowers to default on multiple loans, thereby amplifying the shared debt risk faced by consumer finance companies.

Simultaneously, consumer finance companies continue to grapple with high financing costs

Despite clear directives issued two years ago allowing them to issue secondary capital bonds to expand financing channels, only two companies—Zhaolian and China Post—have managed to receive approvals for bond issuance from local regulatory authoritiesAs for routine funding, consumer finance companies are deprived of the ability to raise public deposits, leading to a lack of stable core liabilities.

In a broad sense, banks offer a substantial edge over consumer finance companies with their ample funding capabilitiesThis advantage manifests in their ability to provide larger loans, lower rates, and more extended repayment termsThese attributes undoubtedly make bank loans the ideal choice for individuals needing considerable financial backing and more versatile repayment optionsNevertheless, borrowers still need to fulfill the stringent credit criterions and approval procedures set by banks, reaffirming that consumer finance companies remain indispensable entities within the consumer finance landscape.