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 (QD.N) 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.
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.
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