China is doubling down on consumer lending as a policy lever to stimulate spending, while simultaneously tightening safeguards to prevent the buildup of financial risks.

The government's recent rollout of fiscal subsidies for personal consumption loans reflects a push to ease borrowing costs and unlock household demand, but regulators and banks are also moving to reinforce risk management frameworks amid signs of deteriorating retail loan quality.

Consumer loans have become a critical tool to enhance purchasing power and stabilize domestic demand.

This year, they are enjoying a "policy dividend period", with authorities signaling stronger support for household borrowing.

Yet, the backdrop is less than rosy: commercial banks have reported a decline in the quality of retail assets, with rising delinquency and nonperforming loan ratios in some institutions. The challenge for policymakers is to use credit to boost spending without fueling a dangerous cycle of debt expansion.

In August, Beijing unveiled a plan to offer interest subsidies for qualifying personal consumption loans. The plan allows for interest subsidies on eligible loans, giving households cheaper access to credit. By doing so, it seeks to accelerate the release of latent consumer potential and, ultimately, bolster economic recovery.

Loan-handling institutions are required to follow market-based and law-based principles while granting personal consumption credit, tailoring loan amounts, maturities and rates to borrowers' qualifications. Disbursement conditions must be independently determined, and loans should be released promptly. At the same time, regulators are mandating strict oversight of loan use to prevent misappropriation of funds.

Analysts have advised commercial banks to adopt "entrusted payment" practices, transferring funds directly to merchants rather than allowing cash withdrawals. This measure is designed to tie credit firmly to real consumption scenarios and prevent diversion into nonconsumption uses such as investment or speculation.

Financial regulators are expected to include compliance with loan-use rules in macro-prudential assessments, and banks that fail to monitor fund flows effectively could face penalties.

The Ministry of Finance, along with financial regulators, will conduct spot checks during policy implementation. Any misuse of subsidies or diversion of funds will be dealt with in accordance with laws and regulations, with local authorities expected to take responsibility for thorough review and screening.

For loan-handling institutions participating in the program, the policy backdrop is both an opportunity and a pressure test.

Lenders are being urged to expand consumer loan issuances to support growth, but they must also manage risks with greater sophistication. Several institutions have pledged to refine admission standards, product rules and management requirements, while strengthening end-to-end oversight of personal loan risks. Digital and data-driven tools are taking center stage in this effort.

Banks are increasingly turning to fintech to enhance risk models and algorithms, using borrower data such as occupation, income, liabilities and credit history to assess repayment capacity more accurately.

Intelligent risk controls — incorporating scenario-based lending, customer segmentation and iterative model upgrades — are becoming standard practice. By embedding these digital safeguards into credit approval, monitoring and collections, banks aim to reduce multiple borrowing, overlending and other systemic risks.

The broader context is a retail credit market that has faced rising risks in recent years. While banks remain under pressure to support consumption, they are simultaneously working to modernize their risk management systems. Building intelligent risk control frameworks and digitizing key processes — from risk checks to collections — are seen as crucial to balancing growth with stability.

With stronger policy guidance, stricter regulatory oversight and smarter risk management tools, the deterioration in personal consumer loan quality is likely to ease in the coming quarters. The hope is that the combination of fiscal subsidies and tighter controls will help unlock household spending power without repeating past cycles of credit-driven instability.

If banks succeed in aligning loan growth with prudent risk management, the personal loan business could achieve healthier and more sustainable expansion.

For policymakers, the effort underscores a broader strategy: using targeted financial tools to support demand while keeping a firm grip on systemic risks.