The upper limit of the annual interest rate has been lowered to 20%, and consumer finance is entering a "painful adjustment period."

Source: 21st Century Business Herald | Author: Li Lanqing

The October that has just passed hasn’t been a calm one for consumer finance companies, small and medium-sized banks, and the loan-assistance (aid-lending) industry.

After the “loan-assistance new regulations” were officially implemented, another round of rate reductions targeting newly issued interest rates by licensed consumer finance institutions was launched. Reporters from 21st Century Business Herald learned from multiple consumer finance and loan-assistance institutions that, guided by regulatory windows, licensed consumer finance institutions must, starting from the first quarter of next year, bring down the average overall financing cost of newly issued loans in the current quarter to 20% (inclusive) or below. In addition, a policy to reduce the interest-rate cap in the small-loan (micro-lending) industry is also under public consultation.

Compared with earlier regulatory guidance that required bringing down the weighted average interest rate (annualized interest rate, same as below) on each single loan to 20% or below by mid-December, this requirement now provides a certain grace period and, to some extent, relaxes the interest-rate range. However, for the consumer finance and loan-assistance industries—and for small and medium-sized banks that need to “prepare for the future”—there is still a degree of pressure. Against this backdrop, some institutions have postponed their financing plans, some have paused newly issued loans, and some have begun staff optimization.

Multiple interviewees all told reporters that “reducing costs” will become the industry’s keyword going forward. The model that previously relied on loan-assistance to expand down-market customer segments and grow market scale may be difficult to continue. At the same time, not only the consumer finance industry, but also small and medium-sized banks must complete the important task of building their own direct channels next.

Multiple consumer finance institutions average lending interest rates above 20%

In recent years, against the backdrop of continual downward adjustments to the LPR and increasingly robust protection of financial consumers’ rights and interests, interest-rate reductions on loans to customers have been the “main theme” across the financial industry.

Specifically for the consumer finance industry, the recent interest-rate cuts are already the second round in the past five years. The previous round was around 2021, when, under regulatory requirements, consumer finance institutions gradually reduced the upper limit on annualized interest rates for personal loans from 36% to 24%.

So how are different institutions executing their loan interest rates? Based on publicly available information, the relevant data can be seen in the subject credit rating reports disclosed in the issuance of financial bonds, while more granular data can be glimpsed through the pool assets disclosed in the latest ABS (asset-backed securities) products.

Reporters from 21st Century Business Herald, based on this, sorted out the loan interest-rate execution status of 11 consumer finance institutions updated for 2025. At present, the average lending interest rates of these institutions are generally cut to within the 24% “red line.” However, due to differences in shareholder backgrounds, business expansion models, and customer base foundations, product pricing varies substantially across institutions, and in some institutions, the share of products above 20% accounts for more than half.

That said, it is also necessary to note that insiders have told reporters that the calculation bases of loan interest rates disclosed in rating reports differ across institutions. Some disclose annual weighted average interest rates, some disclose the average interest rate for newly issued loans, some disclose overall asset average interest rates, and some also do not include actual financing costs under models such as guarantee credit enhancement and equity products in the calculation—so they should be treated only as reference.

For example, while the loan pricing disclosed by JIafu (Ji’an) Consumer Finance is controlled below 24%, in the “Anye 2025 Third Series of Personal Consumption Loan Asset-Backed Securities Issuance Disclosure” the weighted average annual interest rate of the pool assets reaches 23.96%, the lowest interest rate on a single loan is 17.4%, and the highest is 24%. The proportion of loans with interest rates between 23% and 24% is 99.8%;

Haier Consumer Finance’s on-balance-sheet average loan interest rate to customers is 22%, and the weighted average annual interest rate of pool assets in its latest ABS is 23.65%;

Central Plains Consumer Finance’s average loan interest rate is 17.92%, and the weighted average annual interest rate of pool assets in its latest ABS is 22.5%;

Suyin Kaiji Consumer Finance’s weighted average loan interest rate is within 20%, but by the end of March 2025, the share of loans with interest rates between 18% and 24% (inclusive) is 72.43%;

Postal Savings Consumer Finance’s average loan interest rate is within 20%. As of the end of 2024, the share of loans with interest rates above 20% reached 52.10%;

Among the 11 consumer finance institutions in the disclosures above, the one with the lowest customer-facing interest-rate level is Ningbo Bank Consumer Finance, with an average annual loan interest rate of 11.56% and single-loan interest rates distributed in the range of 3.06% to 14.9%.

Under the consensus to reduce costs, transformation accelerates

When the interest-rate cap is reduced again to 20%, and combined with the earlier call-off of “24%+ equity” type products that consumer finance companies used to expand profit sources, “reducing costs” has become a market consensus.

“After the interest-rate reduction, the customer base we face differs a lot from before. Reducing costs is definitely the first priority now.” a senior executive at a consumer finance institution in central China said.

If we further break down the operating costs of consumer finance institutions, they include four components: funding costs, traffic (customer-acquisition) costs, risk costs, and operating costs. In recent years, funding costs in the consumer finance industry have fallen noticeably, but both traffic costs and risk costs have risen to some extent.

In fact, as early as when the 24% interest-rate cap was set around 2021, the industry had already sparked a round of discussions about the “interest-rate survival line.” At that time, figures like 15%, 18%, and 20% were all mentioned. But because there was relatively limited room for cost reductions at that time, 24% was viewed as a relatively commercially sustainable interest-rate boundary.

A senior executive at a consumer finance institution in western China analyzed the current cost structure of his company for reporters: funding costs are about 3%, traffic costs are 4% to 5%, risk costs are about 7%, and the three add up to roughly 15%. Under the 20% interest-rate cap, there is still a 5% margin for operating costs.

“Business can still be expanded, but we can’t build scale.” he said.

Reporters from 21st Century Business Herald learned that after the issuance of the requirements for interest-rate reductions, the consumer finance industry overall tightened the “gateways” for acquiring new customers. For instance, Southern Bank Paribas Consumer Finance, which had planned to issue an ABS with a scale of RMB 2 billion at the end of October, after publishing materials, announced six days later that it would postpone the issuance “after comprehensive consideration of the market environment and actual conditions.” Reporters also learned that other consumer finance institutions’ fundraising plans were “put on hold” as well.

“With it being difficult for incremental scale to break through going forward, the institutions’ own financing willingness and needs also won’t be very prominent.” another senior executive at a consumer finance institution told reporters.

From an objective standpoint, in a low-interest-rate environment, the downward movement in funding costs has become a major positive factor for the consumer finance industry’s cost reduction. The “China Consumer Finance Companies Development Report (2025)” issued by the China Banking Association (hereinafter the “2025 consumer finance report”) shows that last year, policy support and an improved market liquidity environment provided favorable conditions for consumer finance companies’ financing. Financing costs fell further. Among 30 consumer finance institutions that carry out financing business, 19 had weighted financing cost ratios between 2.5% and 3.0% (inclusive).

However, further declines in traffic costs, risk costs, and operating costs mean that some consumer finance institutions have reached a “fork in the road” for transformation.

In terms of how customer acquisition channels are divided, consumer finance companies currently acquire customers through two categories: online and offline channels, and two logic categories for ownership and lead generation—self-operated channels and third-party lead-generation channels. These form four main categories: offline self-operated, offline cooperation with third-party intermediaries, online self-operated, and online cooperation with third-party platforms.

That said, it needs to be explained that the composition of risk costs is relatively complex. Besides losses from non-performing assets, it also includes corporate governance risks, outsourcing staff control risks, and even reputation risks triggered by complaints, etc. Therefore, risk management across the entire business process of each consumer finance institution faces higher requirements. In addition, under online business models, because the cooperation arrangements between consumer finance institutions and third parties such as internet platforms, guarantors, and loan-assistance institutions differ—along with differences in responsibility allocation and profit-sharing models—online business can be further divided into several sub-business models such as pure lead generation, joint operation, revenue sharing, and credit enhancement.

Different business models and resource endowments cause significant differences in how each institution allocates the three costs above, which in turn affects the final pricing of loan products.

Even for the same company’s different products, substantial pricing differences will still appear. A relatively typical case is Ant’s consumer finance that handles both its two major products, “Alipay Huabei” and “Alipay Jiebei.” For “Huabei,” which is positioned as a payment credit tool, its annualized interest rate is in the 0% to 24% range; for “Jiebei,” which is positioned as an individual consumption loan product, its annualized interest rate is in the 5.475% to 24% range. Because “Jiebei” business-scale expansion has increased, since 2023 the share of loans with interest rates above 18% has shown an upward trend.

Additionally, taking Ningbo Bank Consumer Finance—the example with the lowest loan interest rates mentioned above—its main business models include three types: online self-operated, online joint operation, and offline self-operated. Among them, by the end of 2024, the share of online joint operation business was 69.7%, down 20.41 percentage points from 90.11% at the end of 2022. Its cooperation channels are mainly major internet platforms such as Ant, ByteDance, Baidu, Meituan, and WeBank, and the cooperation models include two types: revenue sharing and credit enhancement. Moreover, in recent years, supported by its major shareholder Ningbo Bank, Ningbo Bank Consumer Finance has accelerated the expansion of both its online and offline self-operated businesses, enabling a better balance between scaling up and risk control.

Regardless of which business model, in a context where scale is hard to grow, improving independent customer-acquisition capability so as to reduce traffic and risk costs is the “must-answer” question for the consumer finance industry—and for small and medium-sized banks.

On November 6, Urumqi Bank announced it would stop carrying out cooperative-type personal internet consumption loans, and released a list of ongoing business cooperation, which was seen as a typical example of the contraction of loan-assistance activities by small and medium-sized banks.

For a long time, small and medium-sized banks in central, western, and northeast China have been important sources of funding for loan-assistance industry loan products with interest rates of 24% or above. But after the loan-assistance new regulations included all service fees and guarantee fees into the overall financing cost and set a 24% “red line” for overall financing cost, the rise in compliance costs and traffic costs made this business “not worthwhile.”

In fact, after this round of interest-rate reduction requirements for consumer finance, multiple insiders told reporters that they are worried about the risk of high-interest loan-assistance cooperation by small and medium-sized banks in the future. “It’s not out of the question that regulators will guide the platform side to further reduce interest rates, ultimately bringing customer-facing rates down to the 12% to 16% range. Licensed financial institutions can’t simply serve as the funding source for personal online lending products; they must build their own channels and capabilities.” an insider said.

(Editor: Wen Jing)

Keywords:

                                                            interest rate
                                                            consumer finance