On August 20th, Hangzhou Bank Consumer Finance listed a non-performing asset package for public transfer. The debt had been overdue for 2,239 days, a full six years. Even more striking were two figures: the unpaid principal stood at 59.07 million yuan, while unpaid interest reached 75.53 million yuan, with interest exceeding the principal amount. The longer a debt remains unpaid, the more it accumulates, and the book value becomes detached from its original worth.
This is not an isolated case for Hangzhou Bank. Over the past week, four consumer finance institutions, including Bank of Beijing Consumer Finance, Changyin Wuba Consumer Finance, and Nanyin BNP Paribas Consumer Finance, have intensively listed asset packages ranging from 135 million yuan to 629 million yuan. The shortest overdue period was 465 days, while the longest was Hangzhou Bank's six-year debt. Zooming out, the picture becomes clearer. According to data from the Banking Credit Asset Registration and Transfer Center, in the first half of this year, 24 licensed consumer finance companies listed 122 non-performing asset packages with total unpaid principal and interest of 53.202 billion yuan, a year-on-year increase of 74.5%. These packages involve over 10 million personal consumer loans, with the weighted average age of borrowers around 40 years old—the prime years when people bear the most responsibility, now becoming the epicenter of consumer finance bad debts.
The moment of reckoning for the industry has arrived.
This Debt Was Incurred a Decade Ago
Why does interest exceed principal? The answer lies not in today, but ten years ago. For small unsecured loans with prolonged overdue periods, the contractual interest and penalty interest continue to accrue. The longer the delinquency, the higher the book interest and fees become, eventually surpassing the principal. This is a common phenomenon in long-vintage non-performing assets and represents the historical burden of the early strategy that prioritized scale over risk control. During those years, consumer finance expanded too rapidly. Online customer acquisition and instant loan approvals meant scale trumped everything, with risk control unable to keep pace with growth speed. Money was lent out, and whether customers could repay became a concern for later. Now, these debts are entering deep delinquency en masse. In the asset packages listed in the first half of the year, nearly 80% had been overdue for more than one year. Some debts at Bank of China Consumer Finance have been overdue for over eight years, with a recovery rate of less than 5%.
While old debts remain unsettled, new ones are emerging. Meanwhile, Zhongyuan Consumer Finance has an asset package that entered the transfer process after being overdue for just 101 days. Institutions are shifting from passive cleanup to proactive early transfer and quick disposal.
Clearing Out Is Defusing the Bombs
On the surface, four institutions intensively disposing of bad assets in one week looks like collective self-sacrifice. From another perspective, it is precisely the industry proactively defusing risks. In the 53.202 billion yuan transfer volume in the first half of the year, Bank of China Consumer Finance, Zhaolian Consumer Finance, and Ant Consumer Finance accounted for 28.851 billion yuan, more than half. Each of these three has a different approach to clearing. Bank of China Consumer Finance listed the most packages and saw net profit surge 99.33% year-on-year in the first half—after shedding its burdens, profitability recovered significantly. Zhaolian Consumer Finance's single largest package was 2.108 billion yuan, the heaviest strike in the industry. Ant Consumer Finance listed five projects in the first quarter alone, involving 4.18 million loans and 1.7 million borrowers, with an average unpaid principal and interest of approximately 3,810 yuan per borrower and about 1,550 yuan per loan. Small-ticket, high-frequency, and dispersed—these bad debts are as finely grained as they come.
Regulation is also pushing this process forward. After the implementation of the Consumer Finance Company Management Measures, the 1 billion yuan registered capital threshold has entered its final phase. Jinshang Consumer Finance has just completed a capital increase, leaving only Mengshang Consumer Finance and Shengyin Consumer Finance as the last two in the industry that have not yet met the requirement. The regulatory direction is clear: first, strengthen the capital base, then clean up historical burdens completely. On one side, industry leaders are making large-scale disposals; on the other, laggards are struggling to replenish capital. The divergence within the consumer finance industry is most evident in this round of clearing.
The Japanese Mirror: High Interest Rates Cannot Cover Bad Debts
Let's turn the clock back to Japan two decades ago. In the 1990s, Japanese consumer finance companies expanded aggressively using high interest rates, multiple borrowing, and coercive collection practices, earning the label of the "three evils of consumer finance." Takefuji was the king among them, with founder Yasuo Takei topping Japan's richest list in 1999. However, the model of sustaining operations through high-interest accumulation could not withstand the test of bad debts. In 2006, Japan's Supreme Court capped loan interest rates at 20%, with all excess amounts to be refunded. Takefuji had to refund over 2 trillion yen to more than two million customers. In 2010, Takefuji went bankrupt. An industry that relied on high interest to cover bad debts collapsed under the regulatory iron fist.
The significance of today's proactive clearing in China's consumer finance sector lies precisely here. Rather than waiting for bad debts to snowball into a Takefuji-style crisis requiring regulatory bailouts, it is better to dismantle the bombs yourself. The courage to clear out is preferable to the luck of keeping things going.
After the Clearing, Three Hurdles Remain
Once the debts are transferred, the problems do not disappear. Three hurdles lie ahead. The first is the recovery rate. Discounts on non-performing asset transfers are extremely low, with buyers pricing only on principal. For the portion of Bank of China Consumer Finance's debts overdue for over eight years, the recovery rate is less than 5%. Selling off merely converts uncertain recovery into certain cash—how much can actually be recovered remains unknown. The second hurdle is front-end risk control. Clearing out is treating the symptoms; risk control is the cure. If pre-loan approval and credit models cannot keep up, this round of cleanup will be followed by another. The third hurdle is the capital of small and medium-sized institutions. Industry leaders can afford to clear out because they have ample capital and cheap financing; the tail-end institutions backed by small and medium banks are themselves under pressure, with Mengshang and Shengyin yet to cross the 1 billion yuan threshold. The ability to clear out is itself a scarce resource.
Conclusion
Interest exceeding principal is the most glaring bill from this round of clearing. It reminds the industry that some money was destined never to be recovered from the start. The sooner the loss is acknowledged, the sooner the industry can move forward.