Ant Finance has been one of the more prominent victims of the current crackdown by the central government on the booming fintech industry. But small regional banks are another group getting into trouble, says financial analyst Sara Hsu in China-US Focus.
China’s small banks are under pressure as the fintech sector is experiencing increasing regulation. Regulations cracking down on deposit-taking in the sale of banks’ financial products through third-party platforms will soon result in a contraction of small banks’ loan bases. As larger banks shift from platform deposit-taking to other sources of funds, this regulation will likely compound an already-squeezed small banking sector.
China’s fintech sector is undergoing extensive scrutiny at present, from the sudden imposition of regulations on Ant Financial to the implementation of risk ratings on consumer finance companies. While small banks, which struggle to obtain deposits from their local customer base, had hoped to benefit from the fintech boom, they are facing increasing regulation. Banks overall have been found responsible for subverting financial regulations in order to grow their funding base.
On January 15, the China Banking and Insurance Regulatory Commission banned commercial banks from selling deposit products via third-party internet platforms. The regulatory body stated that China’s fintech sector has brought with it hidden risks regarding information disclosure and product management. Online third-party deposit sales have resulted in the potential for financial contagion.
Small banks in particular found that, by selling financial products through third-party platforms, they could break through geographical restrictions in order to obtain deposits from the entire country rather than from their own location. Products sold online included personal time deposits, with a focus on three and five-year maturities. Interest rates on these products were close to the upper limit of banks’ self-regulatory pricing mechanism, which is tied to the benchmark interest rate. Most products required an initial deposit of only 50 RMB and could be withdrawn at any time.
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