China toughens regulations on payday lenders
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China’s financial watchdogs have issued implementing regulations confirming an existing ban on so-called “payday loans” online.
The measures were released Friday evening by a new state agency set up to regulate internet financing and China’s central bank.
In 2015, the Supreme People’s Court of China ruled that courts would only apply collection on loans that charge annual interest rates of 24% or less. According to the decision, rates of up to 36% were legally allowed, but the lender had to provide its own means to seek repayment of the unpaid debt.
However, enforcement turned out to be lax as small borrowers had to take cases to court themselves. Meanwhile, because online microcredits are limited at the provincial level, cases have been heard by smaller regional courts which have been slow to consider the new ruling.
The new regulations now require online lenders to demonstrate compliance with interest limits in order to maintain their loan licenses.
“For the first time, regulators are very specific and explicit about keeping the rates and fees charged to borrowers below the 36% threshold,” said Spencer Li, vice president of the business lending platform Fincera. “Consumer finance companies could take a hit, or they could raise rates on low-risk borrowers to make up for the loss. “
The new rules also prohibit licensed microcredit companies from raising funds through P2P platforms and banks from funding P2P loans. Many online microlenders hold both P2P licenses and microloan licenses and raise funds through both channels.
Chinese online lenders have already started to feel the effects of tighter regulations as authorities crack down on the overheated fintech space.
The new regulations adopted last week additional licenses for micro-lenders; and prohibited approvals for all micro-lending platforms that lend in all provinces.
Online lender Qudian’s $ 900 million IPO in New York City in October underscored interest in Chinese fintech. However, stocks fell as investors feared the lending platform was masking its bad loan ratio.
Some of the biggest online lenders have taken proactive steps to avoid potential legal disputes. End of november, Alibaba’s financial subsidiary banned consumer loan products that charge annual interest rates above 24% from its marketing platform.