Challenges with disposal of non-performing personal credit loans

Disposal of non-performing personal credit loans is a major issue in today’s financial system. With the extensive use of fintech, particularly in internet finance, banks and other financial institutions have overcome geographical limitations to make online loans the mainstream for personal credit. Consequently, the disposal of non-performing personal credit loans confronts the industry with new challenges.

Status and challenges

Compared to loans through traditional channels, non-performing personal credit loans via online lending are characterised by petty single sums yet with a huge total amount, wider geographical distribution, higher rates of borrower inaccessibility, and multiple debts per borrower.

Consequently, the disposal of non-performing personal loans arising primarily from online lending now presents some new complexities.

First, the total amount and number of non-performing personal credit loans are excessively large, with a low disposal rate per annum. According to 2023 performance reports disclosed by 23 A-share listed banks, RMB5.46 billion (USD764.8 million) in personal loans were issued, with personal consumer loans exceeding RMB4 trillion, marking a 24.3% year-on-year increase.

Assuming an average loan of RMB10,000 and a 3% non-performing rate, there are at least 12 million cases of non-performing personal credit loans. As such, it is projected that there could be hundreds of millions of unresolved cases accumulated across the board by listed banks, small and medium-sized banks, internet banks, consumer finance institutions and microloan companies.

Based on industry insights, the actual number of cases successfully disposed of – through repayment or temporary termination – is between 3 million and 5 million per annum.

Second, non-performing personal loans have a direct impact on individuals’ property and livelihoods, posing significant social risks. Borrowers do not always intentionally default. More often, they are unable to repay due to financial hardship.

Financial institutions used to outsource the recovery of such loans to collection agencies or similar debt collectors. However, the lack of state-backed enforcement and effective oversight of these private coercive measures (whether in the form of violence or soft violence) inevitably lead to significant social problems and eventual crackdowns by state authorities.

Yet, without sufficient enforcement power, financial institutions cannot effectively recover from borrowers who refuse to repay despite being able to do so. This issue, if unresolved, ultimately impacts the overall issuance of personal loan products.

Third, the judicial system is overwhelmed. The principle of registering all cases is fundamental to a modern judiciary. In 2023, courts across China handled a total of 11 million cases, including 5 million civil and commercial cases. If every single case of non-performing personal credit loans were to be litigated, it would be impossible to complete all of them even under the current summary proceedings.

So, the traditional way of resolving non-performing personal credit loans through litigation is unlikely to fully solve the problem.

A way out

Given the current situation, the author, a lawyer with years of research and practical experience in this field, believes the resolution of these challenges primarily lies in the following aspects.

Boosting healthy and rapid socio-economic development. The disposal of non-performing loans goes hand in hand with economic growth. If the entire economic entity is likened to a human body, the financial institutions constitute the circulatory system.

Rather than directly generating revenues, the financial system delivers greatest value by transporting blood (i.e. capital) to where it is most needed. If capital is just lent out but never recovered, the financial system loses its virtuous cycle, ultimately impacting the functioning of various sectors.

Only with robust economic development will more wealth be generated and more fresh blood transported to financial institutions to boost a healthy cycle. Also, economic growth helps raise citizens’ wealth, reducing the risks of non-performing personal credit loans.

Rewriting repayment regulations. Judicial support is crucial to a healthy financial system. Judicial and legislative bodies should establish new rules to reduce the repayment burden from a legal standpoint, allowing debtors to focus on working and making money to repay their arrears.

This requires top-level design, as reflected by recent interest rate cuts for private lending by the Supreme People’s Court. Legislative and financial regulatory bodies need to reframe regulations with due consideration of the interests of debtors, creditors and all parties involved.

The aim is to reduce debt burdens within the legal framework – thereby resolving debt repayment issues without disrupting the legal and credit systems – while maintaining the rule of law and commercial rules.

Innovating operation of bulk litigations. Recent litigation involving bulk cases has seen multiple innovative solutions such as digitising case files, batch service of documents, special sessions for disputed cases, and requests to financial institutions for broader use of bulk evidence provision, as well as batch importing and generating standardised judgment documents.

It is believed that widespread adoption of these measures will help realise a fair trial and efficient execution of cases.

Key takeaways

In summary, the key to resolving non-performing personal credit loans lies in economic development and regulatory innovation. The state will not permit the privatisation of coercive powers that could lead to criminal activities, nor will it allow collection agencies to use violence.

Also, it won’t permit litigation over non-performing personal credit loans to result in widespread restrictions on individuals’ high consumption, as these actions would hinder economic recovery.

Effectively addressing non-performing personal credit loans requires a commitment to reform and opening-up, along with economic development and timely institutional innovation.

Li Guangyu is a senior partner at Hylands Law Firm. Jiang Wanshan, an intern at the firm, also contributed to the article