Internet Finance Group Tells Members to Cap Microloan Rates
As China’s banking watchdog prepares new rules to rein in the chaotic online lending industry, a local industry body in Beijing has stepped into the fray, telling its members to cap the total interest rate and fees they charge on unsecured short-term loans below 36%.
The Beijing Internet Finance Industry Association (BIFIA), an organization that represents some 63 companies with operations in the capital, has also asked members to submit a report by Dec. 8 detailing any products that charge an annual percentage rate (APR) of more than 36% and to disclose how many borrowers are rolling over their debts with new loans from another lender. The APR consists of the nominal interest rate on the loan and any other costs or fees involved.
The notice, which was sent out on Nov. 28, comes as financial watchdogs put the spotlight on the booming, but loosely regulated online lending industry, targeting problems such as excessively high interest rates, improper lending and irregular debt collection practices. Over the past week, the central bank and regulatory officials from 17 provinces have met to discuss stepping up supervision of microlenders. Local governments have been told to stop issuing licenses for microlending, and restrictions have been imposed on companies with licenses awarded in one province from lending to customers in other provinces.
The China Banking Regulatory Commission (CBRC) is expected to issue additional measures later this week to increase control over the industry, a source with knowledge of the matter has told Caixin. The regulations are expected to clarify what constitutes lawful lending and whether cross-regional online lending will be permitted, a source with knowledge of the matter told Caixin.
The BIFIA was set up in 2014 as a self-regulatory body for online lenders to raise standards, promote market discipline and increase information exchange between industry participants. Its members include CreditEase, one of China’s largest financial technology companies whose Yirendai peer-to-peer lending subsidiary is listed in New York, Nasdaq-listed consumer lending group Hexindai and internet lending platform Jimubox.
Current Chinese regulations do not impose limits on interest rates for loans, but lenders only have legal recourse to recover unpaid debts if the rate they charge does not exceed 36%. A Supreme People’s Court ruling in 2015 stipulated that courts would only give borrowers and lenders legal protection and enforce collection if interest rates on a loan did not exceed 24%. Courts who found in favor of a lender could not force the borrower to repay loans where the interest rate charged was between 24% and 36%.
If the lending rate exceeded 36%, creditors could not pursue borrowers through the courts and would have to find their own way of recovering unpaid debts. As a result, some lenders have resorted to violent or illegal methods against borrowers, raising concerns about the impact of their actions on social stability. Reports in Chinese media have said that APRs charged by some lenders are as high as 500%.
In response to increasing government concern over the rates of interest charged on microloans, unscrupulous debt collection methods and the inability of many borrowers to repay high-interest loans, some market players have already moved to lower borrowing costs. Weshare Financial and Doraemoney, have prolonged the lending period of their short-term loan products and lowered their interest rates below 36%.
Last week Ant Financial, the financial affiliate of internet giant Alibaba, banned online lenders from using its Alipay platform from charging an APR higher than 24%. It also ended partnerships with some platforms due to their excessive interest rates and inappropriate debt collection methods.
An executive working at a platform providing unsecured short-term loans told Caixin that it may have to turn away 30% to 50% of loan applicants, or cut its total loan volume by more than half if it is forced to restrict its maximum of 36% APR, although it should still be able to generate profits under such a scenario.
Microlending, which refers to small, unsecured short-term lending, is still a relatively small part of total lending in China. Research firm Wangdai Zhijia estimates credit given out through microlending has surpassed 1 trillion yuan ($151 billion), which is less than 1% of the 118 trillion yuan of outstanding loans in the banking system.
The National Committee of Experts on the Internet Financial Security Technology, a government-backed industry organization, estimates there are 2,693 online platforms offering short-term loans to nearly 10 million clients, with the average size of loans at 1,400 yuan. However, there are only around 218 licensed online microlenders, according to Caixin calculations.
The risks associated with microloans are higher than ordinary bank loans partly because they are unsecured, which means there is no collateral that would offer security to the lender in case of default. The lack of an industrywide database to track and share information on borrowers makes it difficult to assess credit risks with any degree of accuracy. The prospect of making good returns from lending at such high interest rates has also attracted a wave of unscrupulous and unlicensed online lenders.
Caixin reported earlier in November that default risks in microlending might be greater than they appear. Industry executives told Caixin that many borrowers roll over their debts or add to their existing loans by getting credit from other lenders, which causes their total debts to snowball.
Contact reporter Leng Cheng (email@example.com)
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