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New rules to spur Chinese consumer loan ABS

China has published guidance on the issuance of asset-backed securities (ABS) backed by consumer loans, paving the way for a deepening of the securitisation market as the country shifts towards a consumer-led economy.

[HONG KONG] China has published guidance on the issuance of asset-backed securities (ABS) backed by consumer loans, paving the way for a deepening of the securitisation market as the country shifts towards a consumer-led economy.

The information disclosure rules on consumer loan ABS, released by the National Association of Financial Market Institutional Investors (NAFMII), open the fast-track registration system to consumer loan securitisations from commercial banks and consumer finance firms.

This is the fourth such set of rules published by NAFMII following guidance on ABS backed by auto loans, housing mortgages and loans for urban redevelopment.

In April the People's Bank of China (PBoC) replaced the approval system for ABS issues in the interbank market with a registration regime, in an effort to accelerate the development of the market. The new regime is said to have cut the application process from six months to one month.

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NAFMII's new rule spells out the information required in registration reports and the disclosure obligations at different stages of the securities' lives. "Originators should disclose complete data covering at least five years of all their consumer loans. For those which have been in operation for less than five years, they should disclose complete data on consumer loans from the start of the operation," NAFMII says.

After issuance, trustees are asked to provide monthly reports with updates on the asset pool as well as the payment of principal and interest. Consumer loan ABS with a revolving structure are also required to disclose the new assets added to the pool every month.

Analysts welcomed the greater transparency sought in the information disclosure, which they say is crucial to ensure proper pricing and grow the investor base for structured finance products. "With more information disclosed, investors can have a better sense of the risks associated with ABS. This is definitely a positive initiative for the development of securitisation in China," said Marie Lam, Moody's associate managing director of structured finance in Hong Kong.

The new rule is expected to accelerate the growth of consumer loan securitisation, which is nascent in China.

In July, Bank of Ningbo launched the first and only ABS backed by consumer loans of Rmb3.699bn (US$582.3m) in the interbank market, but through the old approval system. It was also the first ABS transaction with a revolving structure.

Banking sources said that the range of authorised originators has also been expanded, with consumer finance firms qualifying as originators for consumer loan ABS. A previous draft they had seen only included commercial banks.

At least three financial institutions have filed registration reports for consumer loan ABS with the central bank, banking sources said.

Regulatory liberalisation has encouraged more financial institutions to issue ABS in the interbank market. According to the website of China Central Depository & Clearing (Chinabond), outstanding ABS in the interbank market rose by about Rmb160.8bn or 60% from the end of last year to about Rmb429.7bn at the end of August.

The expansion in the range of underlying assets available for ABS comes as market participants are noticing a shift in motivation for bank issuers, which in turn should make pricing more market-driven.

Previously, the biggest driver was to remove loans from bank balance sheets to meet regulatory requirements such as deposit-loan ratios, even though sometimes it did not make much economic sense for banks to issue ABS backed by corporate loans.

However with deposit-loan ratios abolished, banks no longer have a very strong motivation to remove loans from balance sheets. Instead, profit making is now the main incentive. "In the past, we were struggling to meet certain regulatory requirements using all approaches available, especially at quarter-end or year-end. But now we have to think about how to actually make money from the securitisation business," said a banker with a commercial bank in Zhejiang province.

NAFMII said it will publish separate rules for consumer loan-backed securities with revolving assets, such as credit cards, in due course.