By Julie Zhu and Cheng Leng
BEIJING / HONG KONG, Nov. 3 – China’s top financial regulators announced Ant Group Co Ltd founder Jack Ma and two top executives that the company’s lucrative online lending business is under tighter government scrutiny, sources said Reuters a few days before its record-breaking listing.
Ant’s Controller Ma, his Executive Chairman Eric Jing, and Chief Executive 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 its consumer cash cow credit business, will face closer scrutiny on issues such as 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 released in its IPO prospectus in late August, the first source said.
Ant’s lending unit contributed nearly 40% 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.
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In Beijing, banks have found it more uncomfortable to often use micro-lenders or third-party technology platforms like Ant to write consumer loans, as fears are raised 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% of all short-term consumer credit granted by Chinese deposit-taking financial institutions.
“Regulators have long tried to contain the fast-growing online lending industry in order to avoid systematic risk to the vast financial sector,” the first source said.
“Ant’s high profile IPO has become a tipping point as it urges all relevant regulators to step up their efforts to investigate the sprawling business.”
During Monday’s meeting, the 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 microcredit lenders to be able to lend online directly to consumers or collaboratively with banks, while limiting the amount they can lend.
The draft, which is open to public feedback until December 2nd, calls for small online lenders to provide at least 30% 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% 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% 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 a strong wind,” 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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