Is the planned new unified personal credit platform workable? #Caixin Weekly#-Sino-US

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Is the planned new unified personal credit platform workable? #Caixin Weekly#
In recent years, the combination of Internet and finance has created the new Internet finance industry, increasing the efficiency of both borrowing and lending money.
The IT companies and traditional financial institutions have tapped into Internet finance. Especially when consumers started using Internet finance to take small loans for consumption, the companies and institutions grabbed the chance to develop the business quickly.
However, since borrowers turning to Internet finance are usually those who could not get loans from banks and have no credit record, financial risks caused by excessive loans and default may surge.
Chinese regulators launched a pilot program in 2015, hoping to bring in the credit record of the online borrowers and control financial risks, but it seems to have not been very effective. 
This year, authorities started planning a nationwide unified platform for collecting personal financial information and assessing people's credit ratings. Whether the platform will work well after its establishment remains unclear.  
In the 44th issue of 2017, Caixin Weekly, a nationally distributed financial and business weekly, ran a cover story on Internet finance, discussing the outlook of the planned nationwide unified platform.
Below is an excerpt of the article.
China has become the world’s largest consumer finance market with an annual growth of more than 20 percent in recent years, which has attracted many online lending platforms to offer consumer finance and cash loans.
Cash loans refer to the online small personal loans. Borrowers don’t need to reveal the purpose for the loan and give collateral, and can get the money very quickly. The period of the loans are usually short - a month or a week. 
Loan providers usually cover the risk of nonpayment and underpayment through primary big data risk control and high interest.
In 2016, the trading volume of cash loans grew explosively, which caught the eye of the leading companies. The high profitability has driven some companies to pursue overseas listing, such as Qudian Inc, Hexindai Inc and PPDAI Group.
However, problems also surged at the same time, such as excessive credit, excessive interest expense and lack of personal information protection. Borrowers rolled over or added to previous debts with new loans from another lender, snowballing their debts, along with their risk of default.
These problems might become unmanageable and ruin the prospects of the online lending industry and crate huge risks. 
Since China still had no nationwide regulatory policies on the online lending platforms, hundreds of peer-to-peer and small loan companies have been set up to provide the consumer finance services across the country.
Data from the National Internet Finance Association of China showed that there were 1,854 such companies in six municipalities and provinces: Beijing, Shanghai, Guangdong, Zhejiang, Shandong and Jiangsu.
These companies, accounting for 70 percent of the total across the country, lent more than 800 billion yuan, 93.7 percent of the total volume, according to the data from the association.
Industry observers said that a lack of industrywide database that tracks and shares the credit information of borrowers has kept lenders in the dark, and there is a pressing need for establishing an effective big data risk control mechanism. 
The database of China’s central bank’s Credit Reference Center contains the information of 440 million people, mainly covering the large licensed financial institutions.
Most clients of medium and small banks, small lenders and online lending platforms are not covered by the database. The borrowers turn to them because they could not get loan from traditional financial institutions.
Currently, some online lenders and small lenders exchange their data with some credit institutions such as Sesame Credit,an Ant Financial subsidiary, to control risks, but data among institutions are still limited.
“The best way to prevent financial risks is to have a credit system covering the entire society and covering all trades, including the small loans,” Wan Cunzhi, director of the central bank's Credit Information System Bureau, said in April.
In January 2015, the central government listed eight institutions in a pilot program for collecting personal information, carrying out credit rating and providing relevant services. But they did not get the licenses in the past three years.
Sources close to authorities said that the National Internet Finance Association of China will lead to the establishment of a unified platform for collecting personal financial information and assessing people's credit ratings.
The platform will complement the existing credit center of the central bank to cover personal credit data, supervise and assess personal debt level from peer-to-peer lenders and some fintech companies, according to the sources.
Authorities will possibly give green light to the establishment of the platform by the end of this year, which will be part of the central bank's regulatory framework to fulfill information sharing and lower the risk in the industry.
The eight institutions in the pilot program were expected to be involved in establishing the platform, each taking about 8 percent stake in the platform.
The lenders have expressed clear and strong demands on the total volume of small loans and default information. “If there is a reliable information platform, we are willing to pay for the services,” a manager of an online lending platform said.
Concerns remain on whether the institutions can really share data and the coverage of the information sources. A credit industry source said that “data is the core asset of the institutions, and forced sharing is tantamount to cutting their ‘flesh.’”
A source close to the preparation of the platform said that the data will be directly collected from more than 200 online lending platforms and 8,000 small lenders and consumer credit companies in counties.
Different from foreign countries with mature policies, regulations and system of consumer finance, the lending platforms in China are scattered and have no unified credit business standards and accounting standards.
The planned platform has to face problems of setting data standards and ensuring the data quality and credibility, inspiring institutions to upload data, prevent false reporting, punish defaulters and meet highly frequent information queries. 
Stained data
Sesame Credit has implemented a cooperation mode with lending platforms: Ant Financial helps platforms to get clients and collect credit data from them, later offering platforms risk control services. 
This mode was an effective way, but there is no standard for data quality since Sesame Credit could only collect the data as platforms wanted to report, a source from the central bank’s Credit Reference Center said.
An expert in crash loan risk control said that platforms would think they spent a lot to learn about the impact of the overdue habit of clients, and they would be reluctant to share such data.
Further, as a large amount of data flows to the platform every day, the platform usually would have no time to check the errors such as loan limits and names of the clients, the source said, and worse, Sesame Credit has no right to verify the data.
Yuan Honghui, an anti-fraud expert from the Beijing Internet Finance Industry Association, said that to retain clients, some platforms might classify them as black-listed for Sesame Credit, so that other platforms would not give them loans.
A credit company employee said that platforms might also report less data, as they wanted to keep the data of good clients. “Platforms have no special personnel on the risk control, and accountants record the data,” he said.
Another industry source said that when platforms did not report the data on time, other platforms and institutions would not get the correct information in time, and the data would also be inaccurate if platforms selectively report data.
Lack of standards is a big problem of the consumer finance industry, such as the cash loan companies having no unified standard on overdue period. The difference also exists in recording the capital, interest and repayment.
A source close to the Shanghai Credit Information Services Co, China’s first company offering personal credit information services, said that data from online lending platforms was very poor, much inferior to the data from banks.
“Online lending platforms have a few employees and invest little to build their system. Only one or two employees take charge of collecting and reporting data, having not enough energy to ensure good quality,” he said.
A data checking mechanism is very important, the source from the Credit Reference Center said. The center once spent several years on checking the data from banks, he said. 
He said three key points to secure the data quality are accuracy, timeliness and integrity. The accuracy refers to the consistent business rules, collecting rules and same understanding of these rules.
NFCS lesson
Whether the new unified credit platform would be effective in collecting personal credit data and offering services remains to be seen, according to skeptics who took the example of Shanghai Credit Information Services Co.
Shanghai Credit Information Services was set up in July 1999 and launched a network finance credit system (NFCS) in 2013, which copied the rules of the Credit Reference Center.
The NFCS could collect personal records in the P2P online lending industry and provide information services for the P2P companies, helping them to fully know about the potential clients, preventing malicious fraud and unsustainable debt levels. 
According to the NFCS website, by the end of September this year, NFCS had 1,079 contracted companies, collecting records of 35.8 million individuals, including 14.92 million individuals with borrowing records. 
There were only 185,000 queries in a whole month in September, which is far below the expectation. The queries to the Credit Reference Center reached 2.5 million times a day.
“The amount of queries is too low, not conforming to the NFCS status. Any leading cash loan platform would see more than 500,000 applications a day, and it shows the NFCS system does not work well,” a manager from an online lending platform said.
“NFCS has a few users and its data quality is poor,” said a source close to the Credit Reference Center. 
Industry sources said that the NFCS system is relatively backward and old, and low efficiency caused by the bureaucratic mindset is the key reason it is not suitable for Internet finance.
Credit institutions would like to keep a small-sized database and be prudent to guard against false data and errors in a long period, but the Internet finance platforms are featured with fast-paced lending businesses, industry sources said.
The new unified platform could not copy the traditional credit systems that did not meet the information sharing demands of the Internet lending platforms. It needs totally new framework and mechanism to be successful. 
Different from NFCS, the new unified platform will realize the data updated daily in its first step, and then realize the data updated in real time to meet the highly frequent queries, according to sources close to the platform’s establishment.

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