China issues new rules to clean up runaway cash loan market
Rapid growth of cash loans has led to ‘over lending, repeated credit extension, unregulated payment collection and extremely high interest rates charges and violation of individuals’ privacy’, according to regulators
China on Friday issued new rules to clean up its controversial cash loan and online micro lending market, including prohibiting lending to people without an income and putting a curb on the total charges on runaway credit, according to an official notice seen by the South China Morning Post.
The notice was jointly issued by the People’s Bank of China and the China Banking Regulatory Commission – the central bank and banking watchdog – to crack down on risks in the nation’s internet financing and peer-to-peer online lending segments.
Cash loans, also known as payday loan, are unsecured, short-term, micro cash advances offered to individuals who do not need to give reasons for the borrowings.
They have grown rampantly in China to the extent that issues such as “over lending, repeated credit extension, unregulated payment collection and extremely high interest rates charges and violation of individuals’ privacy” emerged, the notice warned.
It ordered therefore, that with immediate effect, all organisations and individuals must obtain a licence to conduct lending business. All lending institutions must also state clearly a comprehensive charge, which includes interest rates and various fees charged for different categories of offerings for the loan.
The tightened controls attempt to curb a common practice where online lending platforms bypass the maximum legal interest rate charge of 36 per cent with additional add-on fees.
“The new notice regulate the cash loan market in a comprehensive way as the wide definition of cash loan means it could involve all online micro lending now,” said Yu Baicheng, head of the research institute of wdzj.com, a website monitoring the online lending market.
“On interpretation, the notice means that extremely short term loans [that charges extremely high rates] will wane.”
Lenders are also banned from rolling over the credit more than twice and must put a cap on the cost of each loan. This is to prevent borrowers from taking on new credit to pay back old loans, a practice widely criticised for allowing young people to live beyond their means and be straddled with mounting debt.
Funds from online micro loans are also banned from being used to speculate in stocks and pay for property down payment. In addition, asset management products offered by financial institutions and banks are disallowed to invest in products securitised by cash loans, campus loans – loans granted to students with no regular incomes – or property down payment loans.
Online micro lenders expanded by 23 per cent in two years to 452.4 billion yuan (US$68.4 billion) by the end of 2016. It is expected to reach 500 billion yuan by the end of 2018, according to Beijing-based consultancy iResearch.
Online lenders, including Qudian Inc and PPdai, listed in New York this year.
Qudian, whose share price has dropped below its initial public offering price, said on late Friday it welcomed the rules, calling them timely and that they would ensure an orderly development of the industry.
Since its IPO, Qudian has had to fend off criticisms about its high interest rates and murky operations.
Qudian is backed by Alibaba Group’s affiliate, Ant Financial. Alibaba owns the Post.