Tighter supervision of banks’ personal lending business by the Hong Kong Monetary Authority could force borrowers to turn increasingly to shadow banking to finance their projects, raising the risk profile in the sector.
The authority placed new requirements on risk management for personal lending in January and ordered banks to bring existing policies in line with the guidelines by the end of March.
Such requirements include applying a stress test on each bank’s entire personal loan portfolio, including a scenario where interest rates for personal loans went up 3 percentage points and banks would stop offering long-term personal loans.
“Some of the personal loan borrowers would be declined by the banks [under the HKMA’s enhanced requirements],” said Mickey Tang, head of banking product development & marketing at Dah Sing Bank.
“When they cannot borrow money from the banking sector, they might turn to money lenders for loans.”
“When there are limitations on formal lending business from the banking sector, a shadow banking problem will then arise,” said Raymond Yeung Yue-ting, senior economist at ANZ Banking in Hong Kong. “That is what happened on mainland China.”
On the mainland, property developers and metal companies faced borrowing restrictions due to government policies. They then turned to non-regulated financial firms – the shadow banking sector – for financing.
Total outstanding loans by money lenders are forecast to be as high as HK$33 billion, according to ANZ.
Sin Kwok-lam, chairman of the local money lender First Credit Finance said he expected to see an increase of 20 per cent to 30 per cent on loan demand when the authority implements the new rules.
Money lenders in the city are under police jurisdiction, but are not under the HKMA.
Sin said he did not expect his sector’s lending to create a systemic risk in the city.
“Most of the money from money lenders came from the shareholders of the firms, rather than from banks. Even if the borrowers can’t pay back, or the shareholders have no money to lend out, only a small group of people will be affected,” he said.
The HKMA said the personal loan business of banks reached HK$343 billion by the end of September 2013 from HK$209 billion in December 2007, when quantitative easing began. Figures from the last quarter of last year were not yet available, it said.
Yeung said low interest rates spurred the growth of the personal loan business, but he feels further growth may start to slow as interest rates rise.