China’s banking regulator admonishes Xiaomi-backed online bank XW Bank for charging 30 per cent service fee on consumer loans

Iris Deng
·3-min read

China’s banking regulator has issued an admonishment against an internet-only lender backed by Xiaomi for violating the country’s lending rules, as it intensifies its scrutiny of the financial businesses by technology platforms.

Sichuan XW Bank, founded in June 2016, was found to have charged as much as 30 per cent service fee for consumer loans with an auto financing platform, with an average rate of 8.5 per cent, much higher than the interest rate charged by China’s state-owned commercial banks. The online bank also failed to adhere to the government’s risk assessment and debt collection regulations, the China Banking and Insurance Regulatory Commission said in a statement on Thursday.

The verbal reprimand followed complaints by borrowers against the lender, which have increased significantly since the end of 2019, the regulator said. The regulator did not levy any fines or punishments on the bank, but stressed that all banks and insurers should examine their own operations, particularly where it concerned cooperating with third-party platforms.

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China has recently escalated a campaign to curb the influence of the nation’s largest home-grown technology champions after the top leadership pledged to expand oversight of financial technology, stamp out monopolies, and prevent the unregulated expansion of capital. After the financial regulator foiled Ant Group’s US$35 billion initial public offering, the antitrust and banking regulators issued a litany of rules to ring-fence fintech businesses to curtail any potential risk to the country’s financial stability.

Source: China Banking Regulatory Commission, banks’ websites, SCMP research SCMP
Source: China Banking Regulatory Commission, banks’ websites, SCMP research SCMP

As China transformed from an export-driven economy to one reliant on consumer spending over the past decade, fintech conglomerates rose to serve the country’s 11.8 trillion yuan (US$1.8 trillion) consumer loans market, creating new risks outside the tightly regulated banking system. Fintech firms lent US$516 billion in 2019, 42 per cent higher than the US$363 billion in 2018, according to China’s central bank. Fintech firms lent US$516 billion in 2019, 42 per cent higher than the US$363 billion in 2018, according to China’s central bank.

Until recently, fintech companies had been given room to roam, enabling lenders in China’s so-called shadow banking system to grow into some of the world’s most valuable companies. These “big tech” firms, including the likes of JD Digits, Lufax, Ant Group, have become the top brass of China’s nonbank lenders attracting big cheques from international investors. Ant is an affiliate of Alibaba Group Holding, which owns South China Morning Post.

SCMP Graphics
SCMP Graphics

The CBIRC on Wednesday also prohibited online platforms from lending to college students, in a bid to curb over-lending and to prevent more than 30 million students across the mainland from falling into debt traps. The CBIRC’s statement, jointly released with the People’s Bank of China, the Central Cyberspace Affairs Office, the Ministry of Education and the Ministry of Public Security, said that regulators were determined to weed out illegal practices that “harvest” college students.

XW Bank, which means the “new internet” bank, was one of several online lenders approved in recent years to spearhead China’s experimentation with fintech. Along with Ant’s MYbank and Tencent Holdings’ Webank, XW Bank operates without any bricks-and-mortar branches, just like the eight virtual banking licenses issued in Hong Kong.

XW Bank’s largest single shareholder is New Hope Group, a Sichuan-based producer of animal feed meal, with a 30 per cent stake. Xiaomi, which makes smartphones and a range of household electronic gadgets, owns 29.5 per cent via a unit. The bank had 44 trillion yuan (US$6.8 trillion) of assets by the end of 2019, according to its annual report.

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