(Source: www.forbes.com)

Chinese debtors are to be listed on online platforms as a punishment for dishonesty, according to a notice issued by the Publicity Department of the Communist Party of China (CPC) Central Committee, the Supreme People’s Court, and the China Banking Regulatory Commission (CBRC). This may be viewed as another step toward building a consumer credit rating system, which has been under construction for several years. This ‘social credit’ system is not without controversy, but remains altogether necessary in China’s underfinanced consumer economy.

Debtors exposed

The recently released notice stated that defaulting debtors will soon be named on government websites, which are to be established at the provincial level by the end of the year, and are also encouraged at the municipal and county level. Information will come from local courts and will be incorporated into the credit approval process by banks. This will provide banks with a type of “negative list” of consumers who are identified as credit risks.

The idea behind this move is to promote honesty and punish violators of loan terms. While it was not clearly stated whether firms were to be included as debtors, this action is in line China’s drive to create nationwide credit rating system for consumers, which leaders have been attempting to build up for several years, with mixed success.

Consumer credit ratings lacking

The main issue in constructing China’s credit rating system is that the models currently used are varied and potentially proprietary. Eight technology firms, including Tencent and Alibaba’s Ant Financial, were initially selected by the central bank in 2015 to pilot their own credit scoring systems, based on spending behavior and social media participation. This process was stalled this summer, as plans to license these firms to roll out their new systems were tabled due to possible conflicts of interest. This is because the chosen tech firms also carry out their own e-commerce business and have been relatively unwilling to share data with other platforms.

Consumer credit ratings, however, are necessary pieces of information which allow individuals to apply for and obtain loans. Without them, smaller borrowers face an uphill battle in gaining access to funds. As a result, such borrowers have had to turn to the curb market for funds. These small borrowers often pay higher interest rates for loans and are forced to borrow from a variety of sources, which raises their transactions costs.

More Info: www.forbes.com

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