New Micro-lending Rules Could Oust Thousands of Chinese Fintech Platforms

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The launch of strict new measures concerning online micro-lending is expected to cause a major shakeup in China’s Fintech sector, prompting thousands of unlicensed platforms to suspend operations.

On 1 December China’s Internet Financial Risk Special Rectification Work Leadership Team Office (互联网金融风险专项整治工作领导小组办公室) and the P2P Online Loan Risk Special Rectification Work Leadership Team Office (P2P网贷风险专项整治工作领导小组办公室) issued the “Notification Concerning Standardisation and Reorganisation of Cash Loans” (关于规范整顿“现金贷”业务的通知).

The Notification came shortly after the Internet Financial Risk Special Rectification Leadership Work Team issued an emergency directive on 21 November, mandating the immediate suspension of approvals for the establishment of new online microlending companies.

Domestic observers expect the Notification to cause a major shake up in China’s cash loan sector that could affects thousands of online platforms, given that a huge number are operating without adequate licensing.

According to Changjiang Times there are at least 1,000 online microloan companies operating in China, including P2P lenders, consumer finance companies, and third-party payment vehicles.

As of the end of September this year, however, authorities had only issued 237 online micro-loan licenses, which is less than a quarter of the estimated number of platforms running.

Figures provided by state-run Economic Information Daily are even more extreme, estimating that there are between 2000 to 5,000 “cash loan” platforms operating within China, with only several dozen holding proper online micro-loan licenses.

The new Notification seeks to prevent official banks from colluding with unlicensed operators, stipulating that “banking sector financial institutions cannot provide capital or issue loans in any form to institutions that are not qualified to engage in lending operations, and cannot jointly contribute capital to the provision of loans with institutions that are not qualified to engage in lending operations.”

Yin Zhentao (尹振涛), vice-chair of the Law and Finance Research Office of the China Academy of Social Sciences Research Faculty said to Economic Information Daily that many unlicensed platforms charge exorbitant interest rates and compound interest, as well as use violence to expedite repayment.

Yin expects smaller platforms that are operating illegally to suspend operations in the near future, while larger and better-known platforms will make a rush to grab licenses or adjust their operations.

Yu Baicheng (于百程), head of research at Wangdai Zhijia (网贷之家) points out that the new notification provides for a very loose definition of “cash loan”, which gives regulators greater latitude to crackdown on micro-lending.

According to the Notification a cash loan is defined as lending which “lacks a circumstantial basis, lacks a specified usage, lacks a set client demographic, and lacks collateral” (无场景依托、无指定用途、无客户群体限定、无抵押).

The Notification also targets the charging of exorbitant rates by online micro-lenders, with media reports claiming that some vehicles have levied interest rates of up to 1000%.

It stipulates that the total capital costs charged by lenders in the form of interest rates or other fees must satisfy the stipulations of China’s Supreme People’s court concerning private loans, which provide “no protection” for rates above 36%, while also prohibiting the issuance of loans that breach legal provisions in relation to interest rates.

The total capital costs that financial institutions charge borrowers must be converted into an annualised figure, while all information on loan conditions as well as handling of late payment must be “comprehensively and fairly” disclosed to customers in advance.

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