China's new regulations on web-based micro lending are credit positive for consumer loan asset-backed securities (ABS), a Moody's report said Monday.
"The new regulations will ensure that only strong loan originators remain in the sector and improve underwriting standards and risk controls," said Elaine Ng, a vice president and senior analyst at the rating company.
Chinese banking regulators have rolled out stricter rules to clean up internet lenders amid increasing risks in the booming but loosely regulated market, with approval of online micro lenders halted and lending activities rigorously supervised.
"The regulations also prohibit certain types of loans, which will result in a better quality of underlying loans in ABS," Ng added.
The market will shrink as a result of the tightening, which will in turn lead to increasing defaults in the short term, particularly among borrowers with weak credit profiles and those relying on new loans to repay outstanding debts, the report said.
The issuance of ABS backed by micro loans has declined since the new rules were introduced.
Moody's expects that some originators may need additional capital to bring down their leverage ratios to the permitted level or adjust product offerings to stay compliant with the new rules. At the same time, new issuance will likely remain subdued.
China's micro-lending market has seen explosive growth in recent years, as lending platforms offer easy cash loans to needy consumers. But the industry's relentless growth and lack of regulation have left both lenders and borrowers unprotected, with reports of defaults and malicious debt collection emerging.