An employee counts Chinese one-hundred yuan banknotes (Photographer: Xaume Olleros/Bloomberg)

China Bans Unlicensed Micro-Loans, Caps Rates to Limit Risks

(Bloomberg) -- Chinese authorities banned unlicensed lending and capped borrowing costs in its latest efforts to crack down on the country’s online micro-lenders as financial regulators zero in on risk in the soaring market for consumer credit.

The total interest rates plus fees charged on borrowing can’t exceed the ceiling imposed by the Supreme People’s Court, and lenders are barred from giving loans to those without income, China Business News reported, citing an official notice. Regulators will also stop approving new micro-lenders, and non-compliant creditors that have already been approved will be subject to a review.

At a Dec. 1 briefing in Beijing, the CBRC indicated it would carry out a concentrated operation to clean up the micro-lending industry, which offers almost immediate unsecured loans over the internet, often at high interest rates. The commission said it wanted to make sure interest rates and costs imposed on borrowers didn’t exceed permitted limits.

The latest step would escalate earlier moves to crack down on the sector and its estimated $152 billion of loans. News that China has halted further approvals for online micro-lenders has already pummeled the New York shares of firms like Qudian Inc. and PPDAI Group Inc.

For a QuickTake on China’s war on online loans, click here

Under the new rules, micro lenders cannot seek reimbursement through violence, intimidation or insult, and they must protect the security of customer information, according to the notice published by CBN. Lenders must also stop extending online micro-loans when proceeds are not earmarked for a specific purpose, and financial institutions cannot provide funding to these lenders for their loans. Punishment for violators include requesting rectification, business suspension or license revocation.

PPDAI, which started trading in November, dropped 2.5 percent as of 9:50 a.m., extending loss since its IPO to 31 percent. Qudian reversed an earlier loss to gain 5 percent after announcing a plan to increase its share repurchase program to up to $300 million.

Putting a shorter rein on China’s micro-lending sector is in step with the government’s broader campaign to curb excessive leverage and maintain financial stability. That drive will focus on four areas: shadow banking, asset management, financial holding companies and Internet finance, China’s central bank Governor Zhou Xiaochuan said in a speech in October in Washington D.C.

Last month, Zhou pointed to a buildup of risks that are “hidden, complex, sudden, contagious and hazardous” after total borrowing in China ballooned.

©2017 Bloomberg L.P.

With assistance from Angus Whitley, Alfred Liu

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