China cracks down on online micro-lending firms with new rules

BEIJING (Reuters) - China's financial regulators on Friday circulated new rules to local governments targeting a rampantly growing online micro-lending sector, part of a campaign to rein in its rapidly developing financial sector.

A top-level multi-ministry body, tasked by the central government to bring risks in the internet finance sector under control, said unlicensed organizations and individuals were not allowed to conduct lending business, according to the notice, carried by a publication under China's central bank.

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.

Beijing has zeroed in on the fast-growing and loosely regulated market for small, unsecured "cash loans", which can be quickly issued over 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 the 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 Inc (N:QD) to raise funds in New York.

However, shares of Chinese micro-lenders listed on U.S. stock markets have slumped in recent weeks as 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.

The notice on Friday 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 annualized 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 percent annualized.

Firms must fully and continuously assess borrowers creditworthiness, ability to pay back debt and use of funds, with online micro-loans forbidden from being used to speculate in the stock market or for property downpayment, 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.

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It is not clear what impact the regulations will have on the industry, though online lender PPDai (N:PPDF) 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.

The government also said institutions were not allowed to steal, leak or sell clients' private information.

FUNDING SOURCES LIMITED

The notice confirmed previous reports that regulators had suspended approval for new internet micro-lenders, and would not grant new approvals to micro-loan firms to conduct lending across regions.

Banks were also restricted from providing funding to unlicensed institutions, the notice said.

Banks' asset management products were not allowed to invest in asset-backed securitization products backed by cash loans, campus loans or property downpayment loans, the notice said.

Financial regulators are responsible for the cleanup of micro-loan problems in their respective regions, the notice said.

Institutions should increase risk control and are not allowed to hide non-performing assets, according to the notice.

Online consumer lending in China, of which cash loans are a significant portion, dwarfs similar activity in the rest of the world combined, accounting for more than 85 percent of all such activity globally last year, according to the Cambridge Centre for Alternative Finance.

The boom in micro-lending comes as lenders seek to cash in on rising incomes in a country where credit card penetration remains at about one-third of the population, according to data from the central bank, which says about half a billion consumers do not have a credit score.

The online cash loan sector is projected to reach 2.3 trillion yuan by 2020, according to the research firm iResearch.