Maximum Rate for Private Loans in China Shifts from 36% to 4-Times Loan Prime Rate

 -  -  61


China has launched measures to change the “lawfully protected threshold” for loans between private parties from 36% to a multiple of the Loan Prime Rate (LPR).

The Chinese Supreme Court recently released the “Supreme Peo­ple’s Court Pro­vi­sions Con­cern­ing Sev­eral Is­sues in Re­la­tion to the Ap­plic­a­ble Law for Trials of Pri­vate Loan Cases” (最高人民法院关于审理民间借贷案件适用法律若干问题的规定).

The Provisions cancel the prior “Two Line Three Zones” scheme covering interest rates for private loans, stipulating instead that in future the lawfully protected ceiling for such rates will be 4-times the one-year LPR.

Given that the one-year LPR for August was 3.85%, this means that the maximum legally protected annual interest rate for private loans standards at 15.4%.

Prior to this the Chinese legal system outlined two thresholds of 24% and 36% for the interest rates on private loans.

Under this system Chinese courts would provide support to requests from private lenders for borrowers to pay interest as long as the rate did not exceed 24%, while also stipulating that any interest above 36% would be considered invalid.

Chinese provisions also stipulated that courts of law should sup­port “ap­pli­ca­tions made by bor­row­ers for the re­pay­ment of in­ter­est paid in ex­cess of an an­nual rate of 36%.”

The shift will further increase the role of the LPR, which has emerged as a key benchmark rate since the launch of reforms by the Chinese central bank in August 2019.

The LPR (贷款市场报价利率) in China is the lend­ing rate pro­vided by com­mer­cial banks to their high­est qual­ity cus­tomers, and serves as the bench­mark for rates pro­vided for other loans.

Analysts say that the latest move from the Supreme Court will serve to greatly reduce the legally protected ceiling for private loan interest rates, which will help to reduce loan-related disputes and legal breaches, as well as guide declines in financing costs.

He Xiaorong (贺小荣), a specialist committee member of the Chinese Supreme Court said to state media that private loans were an important part of a multi-tier credit market, while also stressing the importance of participants abiding by laws concerning lending rates.

The Chinese Supreme Court flagged a reduction in the ceiling for private loan rates in July, with the issuance of the “Opin­ions Con­cern­ing Pro­vid­ing Ju­di­cial Ser­vices and Pro­tec­tions to the Ac­cel­er­ated Im­prove­ments of a So­cial­ist Mar­ket Econ­omy Sys­tem in a New Era” (关于为新时代加快完善社会主义市场经济体制提供司法服务和保障的意见). 

The Opin­ions released on 22 July called for “large-scale re­duc­tions in the ju­di­cially pro­tected ceil­ing on the in­ter­est rates for pri­vate loans.”

Zheng Xuelin (郑学林), a mem­ber of Chi­na’s Supreme Court, said that re­duc­tions in the max­i­mum pro­tected rate for pri­vate loans would be the “most ef­fec­tive so­lu­tion” for “eas­ing the cost and dif­fi­culty of en­ter­prise fi­nanc­ing, as well as pre­vent­ing ‘taolu’ loans and fake loans at the source.”

Related stories

Chi­nese Supreme Court Flags Re­duc­tion in 24% – 36% Pro­tected Max­i­mum Rate for Pri­vate Loans

Chi­na’s Bank­ing Reg­u­la­tor Cracks Down on Il­licit Pri­vate Lend­ing

Cen­tral Bank Me­dia Hails Struc­tural Im­prove­ments to Chi­nese Lend­ing in 2019, Rise in Pri­vate En­ter­prise and Long-term Credit

Loan Prime Rate (贷款市场报价利率)

6 recommended
comments icon 1 comment
1 notes
193 views
bookmark icon

Write a comment...

Your email address will not be published. Required fields are marked *