China Sees Rise In ‘Auto-Backed’ Small Business Lenders

Some alternative lenders in China have a unique way of mitigating the risk of borrower defaults: attaching a tracking device to borrower vehicles.

Reports in The Wall Street Journal (WSJ) said a new breed of alternative lenders in China is emerging, dubbed auto-backed lenders, which will repossess a borrower’s car in the case of failure to repay loans. Tracking devices are hidden in car bumpers or behind mirrors, allowing lenders to easily locate the cars and repossess them.

It’s not just consumer lenders that are using this tactic, either. According to reports, one such lender, Weidai, said most of its borrowers are small business (SMB) owners in need of working capital financing. The company recently raised $45 million via initial public offering (IPO) on the New York Stock Exchange, and currently has 225,000 active borrowers, reports said.

These companies are emerging at a time when alternative lending in China is both growing and facing challenges from regulators cracking down on the shadow banking industry. Authorities have introduced measures to tighten registration and licensing requirements for alternative lenders, reports noted, and have worked to combat excessive interest rates.

Wind Information data, examined by the publication, revealed that the balance of outstanding peer-to-peer (P2P) loans in the country has dropped somewhat in recent months, as some players — including auto-based lenders — have closed up shop or decelerated loan origination. However, analysts expect the industry to rebound and expand once again.

Small businesses in China are reportedly struggling to access traditional bank loans, earlier reports noted, with French trade credit insurer Coface recently reporting a capital squeeze on non-state-owned SMBs in the country.

As car sales increase in China, auto-backed lending is expected to pick up, too. An Oliver Wyman analysis, cited by Weidai, said auto-based lenders issued $32 billion worth of loans last year, with industry players claiming that the tactic results in fewer delinquencies — not only because borrowers don’t want to lose their cars, but because having a car in the first place tends to signal greater financial stability for the borrower.

Yet, high interest rates and loan origination fees have garnered criticism from some borrowers, reports added.