China urges Ant to await a lending review before listing the records: sources

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China’s top financial regulators told Ant Group Co Ltd founder Jack Ma and two top executives that the company’s lucrative online lending business was under tighter government scrutiny, sources told Reuters a few days before its record-breaking listing .

FILE PHOTO: An Ant Group logo is pictured at the company’s headquarters in Hangzhou, Zhejiang Province, China on Oct 29, 2020. REUTERS / Aly Song / File Photo

BEIJING / HONG KONG: China’s top financial regulators told Ant Group Co Ltd founder Jack Ma and two top executives that the company’s lucrative online lending business is under stricter government scrutiny, sources told Reuters a few days before its record breaking business Listing with.

Ants Controller Ma, CEO Eric Jing, and CEO Simon Hu were invited to a rare joint meeting with senior officials from four regulators on Monday as Beijing released new draft rules for online microcredit.

The trio have been informed that the company, particularly the cash cow consumer lending business, will face stricter scrutiny on issues like capital adequacy and leverage ratios, said two sources who were briefed on the matter. They declined to be identified as details of the meeting were not made public.

The move comes as some of the regulators were “surprised” by Ant’s business and financial figures, including the size and profitability of its lending business, the details of which were first published in its IPO prospectus in late August, the first source said.

Ant’s credit unit contributed almost 40 percent to consolidated sales in the first half of the year. It owns Ant’s consumer credit business, which includes Huabei, which works like a virtual credit card service, and short-term consumer credit provider Jiebei.

In Beijing, banks have found it more uncomfortable to often use micro-lenders or third-party technology platforms such as Ant to subscribe to consumer loans, amid fears in a pandemic-hit economy that defaults will increase and asset quality will deteriorate.

Ant’s consumer credit balance at the end of June was 1.7 trillion yuan ($ 254 billion), which is 21 percent of all short-term consumer credit issued by Chinese deposit-taking financial institutions.

“Regulators have long tried to contain the fast-growing online lending industry in order to avoid systematic risks to the huge financial sector,” the first source said.

“Ant’s high-profile blockbuster IPO has become a tipping point as it urges all relevant regulators to step up their efforts to investigate the sprawling business.”

During the meeting on Monday, People’s Bank of China (PBOC), China Securities Commissioner (CSRC), China Banking and Insurance Commissioner (CBIRC) and Foreign Exchange Commissioner called Ant to properly comply with the new microcredit regulations, the second person said.

Ant declined to comment. CBIRC and the State Administration of Foreign Exchange did not immediately respond to faxed requests for comments. PBOC and CSRC could not be reached by phone outside of business hours.

China’s central bank and banking regulator separately released draft microcredit rules on Monday, which aim to raise the bar for micro-lenders to lend online directly to consumers or collaboratively with banks, while limiting the amount they lend can.

The draft, which is open to public feedback until December 2, stipulates that small online lenders provide at least 30 percent of all loans they jointly finance with banks. This is widely viewed as a key rule affecting the profitability of Ant’s current business model.

Only 2 percent of the 1.7 trillion yuan in consumer credit that Ant made possible was on its balance sheet at the end of June, the prospectus showed. Analysts estimate that the company is able to cut loan interest rates by an average of 30 to 40 percent without taking the credit risk of these products.

Ant will go public in Hong Kong and Shanghai on Thursday after raising around $ 37 billion, including the domestic branch’s greenshoe option, in a public record sale of shares.

The latest regulatory move is likely to dampen Ant’s post-debut performance, sources and some institutional investors warned on the IPO.

“A tree that is much taller than others can more easily fall victim to strong winds,” said the second source.

(Reporting by Julie Zhu in Hong Kong and Leng Cheng in Beijing; Editing by Brenda Goh and Susan Fenton)

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