The senior management of Li Zhen's licensed consumer finance institution plans to lower the upper limit of the annualized interest rate for personal consumer loans from 24% to 20% by the end of the year.

Li Zhen is the Operations Director of a licensed consumer finance institution in Central China. He said that the local financial regulatory authorities provided them with "window guidance" in July this year, reiterating that the weighted average interest rate for new personal consumption loans within the year should not exceed 20%.

Since the implementation of the "Regulations on the Disclosure of Comprehensive Financing Costs for Personal Loan Business" on August 1st this year, several licensed consumer finance institutions have rapidly updated the upper limit of annualized interest rates for personal consumer loans.

Among them, Southern Bank Faba Consumer Finance and Mongolian Commercial Consumer Finance have respectively set the upper limit of the annualized interest rate for personal consumption loans at 20%, which is lower than the commonly implemented 24% in the industry. This means that both institutions voluntarily gave up 4 percentage points of interest income.

Lowering the upper limit of loan interest rates is the trend, "Li Zhen told Economic Observer reporters. In the second quarter, financial regulatory authorities required individual consumer finance institutions to conduct business stress tests at three levels of annualized interest rate caps -4 times LPR (Loan Market Quotation Rate), 18%, and 20% - to evaluate their business operations under different interest rate cap environments.

Li Zhenyu feels that licensed consumer finance institutions need to proactively plan ahead in order to adapt to the business environment of lowering the upper limit of loan annualized interest rates.

However, the adaptation process is not easy. Li Zhen found that when the upper limit of the annualized loan interest rate is lowered from 24% to 20%, the entire business's profit and loss account and customer base management strategy will face a series of impacts. If there is a loophole in one link, the overall performance of the company will quickly change.

Profit and loss account

In August, Li Zhen's licensed consumer finance institution launched an operational stress test - assuming that the upper limit of the loan annualized interest rate is lowered to 20%, whether its self operated business and loan assistance cooperation business can continue to be profitable.

Li Zhen said that the preliminary test results are not optimistic. In terms of self operated business, the management team calculates that the cost of capital, self operated customer acquisition cost, operating cost, and risk control cost (including overdue bad debt rate) are 5%, 5%, 2%, and 4-6%, respectively. This means that the overall operating cost of self operated business is between 16% and 18%; If the upper limit of loan interest rate is lowered to 20%, after deducting relevant taxes and fees, the actual profit margin of this business is only 1.3% -1.5%.

Li Zhen said that this is the operational performance obtained under general scenario assumptions. If there are poor scenarios such as market fluctuations and risk control loopholes, and the bad debt rate rises by more than 1 percentage point, the self operated business may suffer losses.

Compared to other businesses, the risk of losses encountered in loan assistance cooperation is greater.

At present, Li Zhen's licensed consumer finance institution is using 30% of its business funds for loan assistance cooperation. Both parties agree that as long as the loan assistance business generates profits, licensed consumer finance institutions will take 35% of the profit sharing.

In early August, when he informed multiple cooperative lending institutions of his plan to lower the upper limit of the loan annualized interest rate to 20%, the feedback he received was: "This will result in neither party receiving profit sharing.

The lending assistance institution also calculated an account for Li Zhen. In the current market environment, the funding cost, investment and customer acquisition cost, operating cost, and risk control cost (including overdue bad debt rate) of the lending assistance institution are 6%, 8%, 2%, and 5-7%, respectively. This means that the actual operating cost of the loan assistance business is between 21% and 23%. If the upper limit of the loan interest rate is lowered from 24% to 20%, it will be almost difficult for the loan assistance business to make a profit.

Li Zhen believes that these lending institutions have sufficient room for cost reduction. So he clearly informed the other party that in order to maintain the cooperative business of loan assistance, the loan assistance institution must find a way to reduce the overall operating costs to within 18%.

However, the business manager of a loan assistance institution told Li Zhen that although they continued to reduce investment and customer acquisition costs in the second half of the year, due to the impact of financial black and grey products, the one month collection success rate of borrowers' overdue loans plummeted to 72% in July, more than 10 percentage points lower than the previous average level, and the corresponding potential bad debt rate increased by more than 1 percentage point. In order to control the risk of bad debts, they can only hire third-party debt collection agencies to increase their collection efforts, resulting in an overall increase in operating costs instead of a decrease.

Business Impact

During the business stress testing process, the operations department frequently reported to Li Zhen that if the loan interest rate cap is lowered to 20% before the end of the year, about 30% of loan customers will not meet the loan approval standards, resulting in a reduction in business scale and profits. How can this be properly resolved.

After reviewing business data, Li Zhen found that about 30% of loan customers have an annualized loan interest rate of 24%. These loan customers are mainly blue collar workers and flexible employment groups with unstable income and poor personal credit conditions, as well as individual businesses with high uncertainty in sales payment cycles and weak risk resistance capabilities; Its credit score is generally between 60-70 points, with a significant difference from the credit score of 75-80 points required for an annualized interest rate loan of 20%.

Faced with the pressure of shrinking loan customer base, Li Zhen's initial idea was to increase the efforts to attract and acquire customers, and replace the loan customer base with high-quality new customers with credit scores below 70.

But he soon realized that this was not feasible because the cost of acquiring high-quality customers was too high, exceeding the "break even point" of their business model.

In the first half of this year, Li Zhen's licensed consumer finance institution obtained a valid customer with a credit score of over 70 through short video platform investment, which cost 900-1100 yuan. However, since July, due to the industry's early layout and competition for high-quality customer groups, this price has rapidly increased to 1400-1500 yuan.

So, Li Zhen could only turn inward to tap into his potential. In mid August, he convinced the senior management to provide 20 million yuan in loan funds and attempted to lend at an annualized interest rate of 20% to some borrowers with credit scores between 68-75. By tracking and analyzing their repayment status, he judged whether the threshold for 20% annualized interest rate loans could be extended to this customer group, thereby expanding loan coverage.

He said that if this attempt achieves good results, about 10% of loan customers will not be "refused loans", further easing the pressure on business scale and profits caused by the adjustment of loan interest rate limits.

Jiang Feng is the Operations Director of a licensed consumer finance institution. In early August, the licensed consumer finance institution he works for had lowered the upper limit of the loan annualized interest rate from 24% to 20%.

Jiang Feng noticed that there were two rapid changes in the company's business strategy: firstly, the cooperation in multiple offline business scenarios with relatively high marketing costs but average customer acquisition and drainage effects was gradually stopped; Secondly, lenders who originally lent at an annualized interest rate of 24% are generally unable to renew their loans, accounting for approximately 15% of the company's entire customer base.

As a result, the operations team began to worry that the customer loss caused by the above measures would result in the inability to achieve the target of a 10% year-on-year increase in business scale set at the beginning of the year.

The senior management of Jiang Feng's consumer finance institution stated that after the adjustment of the loan interest rate ceiling, the focus of the company's business development in the second half of the year will shift to refined operations and performance improvement. If the growth rate of business scale slows down, it is inevitable that each operation team will ensure that profits continue to grow year-on-year.

In Jiang Feng's view, this is also a difficult task to complete. In the past few years, the profit of this licensed consumer finance company has achieved year-on-year growth, entirely relying on the "quantity to price" strategy - that is, through the growth of loan business scale, driving the continuous increase of profits.

Pressure reduction and loan assistance cooperation

Li Zhen said that due to the impact of risk events in some lending institutions, the senior management of his licensed consumer finance institution has planned to reduce the proportion of cooperative lending funds to 15%. Nowadays, it is difficult for lending institutions to achieve profitability in cooperative business under the 20% loan annualized interest rate cap environment, which provides a new reason for senior management to compress the scale of lending cooperation.

Li Zhen said that in early August, the company's senior management clearly stated that the company will focus on developing self operated business in the future, ensuring that self operated business can continue to make profits under the 20% loan annualized interest rate ceiling environment, which will be a major focus of work in the second half of the year.

The reporter learned that in the face of the trend of lowering the upper limit of loan interest rates, consumer finance institutions are leveraging technology to find a new balance between reducing operating costs, strengthening credit risk management, and maintaining sustainable business development.

Specifically, on the one hand, they enable AI (artificial intelligence) to directly participate in the telemarketing business process, reducing costs and improving efficiency in the assistance of agents and precise promotion of loan products. On the other hand, through AIGC (artificial intelligence generated content), they transform complex financial materials such as borrower's documents, contracts, statements, reports, conversations, videos, etc. into interpretable, moldable, and assessable business variables, allowing AI big models to participate in data classification and ranking and risk characterization learning, continuously reducing risk control operating costs.

In Li Zhen's view, in order for self operated businesses to continue to make profits under the new loan interest rate cap environment, it is not enough to rely solely on cost reduction. It is also necessary to further improve the accuracy of risk control to lower the bad debt rate.

At present, Li Zhenzheng has introduced a risk control intelligent agent, where AI approval officers first understand the loan application materials and the actual business situation of the relevant borrowers, independently call multiple risk control models to evaluate their potential repayment risks, regenerate relevant approval suggestions and key basis, and assist risk control personnel in making more accurate credit decisions.

Li Zhenchu estimated that this move may reduce risk control operating costs and credit bad debt rates by 0.5 percentage points and 0.3 percentage points respectively, freeing up new "profit space" for self operated businesses.

(At the request of the interviewee, Jiang Feng is a pseudonym)

(Author Chen Zhi)