China’s financial regulators on Friday issued new rules to local governments targeting fast-growing online micro-lenders, which are part of a campaign to rein in a rapidly developing financial sector. 

According to the new rules, unlicensed organizations and individuals are not allowed to conduct a lending business. Lending institutions are also not allowed to give loans to borrowers with no source of income or to mislead consumers into over-borrowing.

Beijing has zeroed in on the loosely regulated market for small, unsecured “cash loans,” which can be issued by mobile phone apps and have come under criticism for exaggerated advertising and aggressive debt collection.

The rules were devised by a multi-ministry body, tasked by the central government with bringing risks in Internet finance under control.

“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 a statement, adding that “this [the new rules] has led to relatively big hidden financial and social risks.”

Due to loose government rules and the rush to supply credit, companies, like Ant Financial-backed Qudian Inc, China Rapid Finance and PPDai, providing micro-loans in China have expanded rapidly in the past few years. 

Although some of them are easily raising funds in New York, shares of micro-lenders listed on US stock markets have slumped in recent weeks. 

Beijing is still widely expected to issue new rules to clean up the sector, estimated to be worth 1 trillion yuan (151.5 billion US dollars) with thousands of players. 

Under the Friday notice, institutions are forbidden from charging interest rates that do not comply with the law and from conducting violent debt collection.

All-in interest rates – which include upfront fees charged for loans – must be within the legally allowed annualized interest rate for loans, the notice said, and terms and conditions of loans must be clearly communicated to borrowers.

As the maximum allowed legal rate in China is 36 percent annualized, micro-lender firms must fully and continually assess the creditworthiness of borrowers and their ability to repay debt.

Online micro-loans may not be used to speculate in the stock market or make down payments on property, according to the notice.

It is not clear what impact the regulations will have on the industry. Online lender PPDai said in its listing prospectus, filed in October, that borrowers of its short-term cash loan products can extend their loans up to three times.

PPDai, which started trading in November, dropped 2.5 percent as of 9:50 a.m., extending its loss since its IPO to 31 percent. 

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 the National Bureau of Statistics. 

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 includes requesting rectification, business suspension or license revocation. 

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 Center for Alternative Finance.

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. 

Last month, in an article on the People's Bank of China's website, central bank governor Zhou Xiaochuan pointed out that the risks facing China's financial system are “hidden, complex, sudden, contagious and hazardous” after total borrowing in the country ballooned.