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