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FINANCE

Loan Sharks Targeted as Problems Mount

By Wu Yujian and Dong Tongjian

(Beijing) — China’s banking watchdog is stepping up efforts to control the booming online market for cash loans as concerns grow over unscrupulous practices that are causing uproar among the public and threatening social stability.

The China Banking Regulatory Commission (CBRC) has told local governments to compile a list of online peer-to-peer (P2P) lending platforms and other online businesses that lend money in their area, and to identify and address risks associated with short-term loans of about 100 days made without collateral and at high interest rates, according to a regulatory notice seen by Caixin reporters. Local authorities are responsible for issuing licenses to and supervising companies that conduct lending business within their geographic jurisdictions.

The commission also told local governments to call in the police where online lenders are suspected of charging usurious interest rates and using violence against borrowers who have difficulty repaying their loans, according to the notice. It highlighted high borrowing costs as a major risk to “economic stability,” and cited media reports that interest rates on cash loans averaged 158%, with some as high as 598%.

That compares with the central bank’s benchmark one-year lending rate of 4.35%. Rates charged by banks on consumer loans are typically a third higher than the benchmark, although some lenders charge even more.

The Supreme People’s Court has ruled that courts will only accept cases involving debt collectors seeking repayment of their loans if the interest rate charged doesn’t exceed 24%. As a result, creditors have to find other ways to get their money back if the rate is higher, and often resort to physical violence and threats against borrowers.

The case of a young man who killed a debt collector who had humiliated his mother sparked outrage on the internet last month after a newspaper investigation revealed details of the incident. The court that had convicted the man ordered a review of his life sentence and ordered prosecutors to examine the police’s conduct in the lead-up to the murder.

Lack of risk control and rising bad loans are also problems plaguing the cash loans business, the notice said. When borrowers default, fear of violence often leads them to take out new loans to pay back their original debts, it said.

There is no comprehensive data on short-term cash lending, given that many lenders operate in the shadows. An April 12 report by Shanghai Ying Can Investment Management Consulting Co. Ltd., which tracks the internet financing industry, estimated that outstanding short-term loans granted by online financing companies such as Shenzhen Credit Finance Investment Management Co. Ltd. and Souyidai, an online credit lender under the Nasdaq-listed internet company Sohu.com Inc., could range from 600 billion yuan ($87.2 billion) to as much as 1 trillion yuan.

Shanghai Ying Can’s report said that interim rules published last August by five central government bodies including the CBRC, which put a cap on P2P loans, have contributed to a surge in demand for informal small cash loans. Under the regulations, an individual cannot borrow more than 200,000 yuan from a single P2P lending platform while companies can only borrow up to 1 million yuan.

Contact reporter Dong Tongjian (tongjiandong@caixin.com)

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