China pauses online microlending licensing

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China’s financial regulators have paused issuance of new licenses for online micro-lending services as they draft new rules to catch up with the fast-changing business.

“Cash loans online has stepped into areas that are not traditionally open to internet finance. They also charge high-interest rates to as much as 600 percent, which is illegal. That's why the bad loan rates are high,” said Professor Dong Ximiao from Renmin University of China.

So what did other countries do to improve legislation regarding small private lending?

/CGTN Photo

In the UK, companies can start operating micro lending just by registering with the Office of Fair Trading. Meanwhile, the Consumer Credit Act says that a licensed lender must disclose almost every detail of the lending agreement, such as the lending rate and time limit.

Though there is no minimum capital requirement for the lenders, Britain did pass a law in 2015 to cap the micro lending interest rate at 0.8 percent a day, and the total cost at 100 percent of the original sum.

In the US, all microlenders are registered as a securities brokerage and have to pay an expensive registration fee. The move lowers risks and limits the weaker players in the sector. The lenders now also have to assess the borrowers’ economic conditions and put a lending cap accordingly.

Peer-to-peer lending is also new in France, and is treated as a financing activity that's subject to consumer credit laws. Companies in the lending business are required to have licenses and must partner with a bank or financial institution. Authorities have outlined a regulatory framework for the sector, but a complete set of laws still does not exist.

/CGTN Photo

The People's Bank of China data shows that more than 86,000 micro-lenders were operating in China in the first half of this year, with the total borrowing amount reaching over 960 billion yuan (145.6 billion US dollars).

The problems with private lending can even be trickier in China as they are handled online.

So far some listed companies in the country responded to the government’s crackdown by taking action. The Busen Group said it would terminate their participation in the founding of an online micro-lending firm.

Zhima Credit, a third-party credit rating service under Alibaba’s finance arm, has tightened cooperation with online lending platforms and said it's inspecting the cash loan platforms that it has ties with and has suspended service to some of them.