China cracks down on online micro-lending firms

China’s financial regulators have circulated new rules to local governments targeting fast-growing online micro-lenders, part of a campaign to rein in a rapidly developing financial sector.

Under the new rules, unlicenced organisations and individuals are not allowed to conduct a lending business, according to the notice.

Lending institutions are also not allowed to give loans to borrowers who have no source of income or to mislead consumers into over-borrowing, according to the notice.

The rules were devised by a multi-ministry body, tasked by the central government with bringing risks in internet finance under control. Beijing has zeroed in on the loosely regulated market for small, unsecured “cash loans”, which can be issued by mobile phone apps and have come under criticism for exaggerated advertising and aggressive debt collection.

“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 over-lending, 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.”

Companies providing micro-loans have expanded rapidly in the past year, partly due to loose government rules. The rush to supply credit has also led Chinese micro-loan firms such as Ant Financial-backed Qudian, China Rapid Finance and PPDai to raise funds in New York.

However, shares of micro-lenders listed on US stock markets have slumped in recent weeks. Regulators were widely expected to issue new rules to clean up the sector, estimated to be worth 1 trillion yuan ($151.5 billion) with thousands of players.

Shares of China Rapid Finance plunged 18.9 per cent on Friday while PPDai shares dropped 8.3 per cent. Qudian shares rose 1.3 per cent after it said it endorsed the new rules and announced a $300 million share buyback. The notice said institutions were forbidden from charging interest rates that do not comply with the law and from conducting violent debt collection.

All-in interest rates — which include upfront fees charged for loans — must be within the legally allowed annualised interest rate for loans, the notice said, and terms and conditions of loans must be clearly communicated to borrowers. The maximum allowed legal rate in China is 36 per cent annualised.

Firms must fully and continually assess the creditworthiness of borrowers and their ability to repay debt. Online micro-loans may not be used to speculate in the stock market or make down payments on property, the notice said.

The maximum number of times a loan can be extended is “generally” two times, the notice said, without explaining what if any exceptions there were. 

It is not clear what impact the regulations will have on the industry. Online lender PPDai said in its listing prospectus, filed in October, that borrowers of its short-term cash loan products can extend their loans up to three times.

China Rapid Finance does not allow any loan extensions, the company told Reuters.

“Borrowers may only borrow new loans after prior loans have been fully repaid without delinquency. Among (our) 3.7 million borrowers to date, none has received loan extensions and all have repaid past loans in full prior to receiving new loans,” said Zane Wang, Chairman and CEO of China Rapid Finance. 

The notice confirmed previous reports that regulators had suspended approval for new internet micro-lenders. Nor will they grant new approvals to micro-loan firms to conduct lending across regions.

Banks were also restricted from providing funding to unlicenced institutions, the notice said. Their asset-management products were not allowed to invest in asset-backed securitisation products backed by cash loans, campus loans or property downpayment loans, the notice said.