China Clamps Down On Online Micro-Lenders

The Chinese government’s financial regulators have distributed new rules to local governments, targeting the fast-growing online micro-lending industry.

According to news from Reuters, under the new rules, unlicensed organizations and individuals are not allowed to conduct a lending business. Lending institutions are also not allowed to give loan applications to consumers who have no source of income or to mislead consumers into overborrowing.

The Chinese government is focusing on the loosely regulated market for small, unsecured “cash loans,” which can be issued by mobile phone apps. The consumer loans have come under criticism for exaggerated advertising and aggressive debt collection.

The online cash loan sector is projected to reach 2.3 trillion yuan by 2020, according to iResearch.

“Amid the rapid development of cash loans — while they have played a role in meeting the normal credit needs of some groups — problems such as overlending, repeat borrowing, improper collection, abnormally high interest rates and privacy violations have become prominent,” the multi-ministry group said in a statement. “This has led to relatively big hidden financial and social risks.”

The notice confirmed previous reports that regulators had suspended approval for new internet micro-lenders. It also forbids institutions from charging interest rates for loans that do not comply with the law and from conducting violent debt collection.

In addition, all-in interest rates, which include upfront fees charged for loans, must be within the legally allowed annualized interest rate for loans, and terms and conditions of loans must be clearly communicated to borrowers. The maximum allowed legal rate in China is 36 percent annualized.

The new financial regulations also state that lenders must fully and continually assess the creditworthiness of borrowers and their ability to repay debt. The maximum number of times a loan can be extended is “generally” two times.

The government also said institutions were not allowed to steal, leak or sell clients’ private information. Online micro-loans may not be used to speculate in the stock market or make down payments on property.