It was mid-February, near the peak of China’s coronavirus outbreak, and MYbank had to decide whether to reduce its exposure or keep doling out loans. After a two-day marathon of calls and emails from self-isolation, the firm’s executives agreed with 25 partner banks on a potentially risky strategy: cut interest rates and turn on the credit taps like never before.
MYbank is now on track to issue a record 2 trillion yuan (S$399.9 billion) of new loans to small- and medium-sized companies this year, up nearly 18% from 2019. “In face of the virus outbreak, we have not lowered our business targets,” Jin Xiaolong, the firm’s president, said in an interview.
While the lending surge aligns with Chinese government efforts to revive the world’s second-largest economy from its pandemic-induced slump, it comes with plenty of risk for MYbank and its biggest shareholder, Ma’s Ant Financial.
This year’s crisis marks the first major stress test of MYbank’s loan algorithms, which crunch real-time payments and other data to evaluate borrowers that often lack collateral and credit histories. If the push to boost lending causes defaults to jump, it could mean less profit for MYbank and by extension Ant, which has plans for an eventual initial public offering.
“The model is yet to be tested in a full credit cycle,” said Wang Haimei, an analyst at Shanghai-based research firm WDZJ, which specializes in online lending.
MYbank is a major part of Ant’s so-called open banking strategy, which also includes a consumer lending platform and a technology group that sells cloud computing and other infrastructure to lenders. Ant is on track to generate 65 per cent of its revenue from these services by 2021, up from about 35 per cent in 2017, according to a person familiar with the matter.
Before the coronavirus brought swathes of China’s economy to a halt in the first quarter, MYbank said its 3,000-variable risk management system kept defaults at a mere 1.3 per cent of total loans. While Jin declined to provide an updated figure on delinquencies, he said a recent uptick has been within his “expected range.”
“Some small businesses are running into operational difficulties and the loan repayment rate has not been as high as before,” Jin said, adding that credit quality during February and March was “predominantly healthy.” MYbank finances some of its loans with its own capital, but other lenders also use the platform to reach smaller borrowers they historically shunned.
“With SMEs desperate for financing as they come out of the pandemic and try to resume normal production, profitability shouldn’t be our top priority,” Jin said. “We also found that more and more banks are asking us about leveraging Ant’s risk management technologies and partnering with our platform, so we can support more SMEs in need together.”
The Chinese banking system’s non-performing loan ratio nudged up by 0.06 percentage point to 2.04 per cent in March from three months ago, according to official figures, even as lenders deferred payments on or rolled over a combined 1.5 trillion yuan in loans. China Merchants Bank Co., one of the country’s biggest lenders to small businesses, saw its overdue micro-finance loans nearly double from the end of last year to 6.2 billion yuan in the first quarter.
Whether delinquencies become a bigger problem will depend on how quickly China’s economy recovers from its 6.8% first-quarter contraction. Slumping global demand is likely to remain a headwind for months to come, but Jin see signs of optimism as the country rolls back its virus lockdown measures.
“We can see businesses are recovering in March,” Jin said. “We are confident that we can issue more than 2 trillion yuan of loans this year.”