New Hope for China’s Online Lending Industry After Years of Crackdown

China’s banking and insurance regulator issued a new set of draft rules in an attempt to standardize online lending by commercial banks. The draft rules aim to address issues such as privacy violations against consumers, inefficient supervision and monitoring of the use of funds and the industry-wide problem of inadequate risk management.

China’s online peer-to-peer (‘P2P’) lending businesses were born during a wave of deregulation. The past two years have seen a massive crackdown by the government on online lenders, in an industry widely considered to be plagued with defaults and fraud. At its height, the P2P sector had outstanding loans over $150 billion and over 50 million investors. The government effort to clean up the bad debt and non-compliant businesses has led to over 2,000 platforms shutting down.

The ‘Interim Measures on the Administration of the Online Lending of Commercial Banks (Consultation Paper)’ was published by the China Banking and Insurance Regulatory Commission (‘CBIRC’) in order to solicit comments from industry stakeholders and the public at large.

Some of the key regulatory takeaways from the Consultation Paper are:

• New Limits on the Principal Amount and the Loan Term
  A ceiling of RMB 200,000 has been placed on the facility amount of unsecured personal loans for consumption purposes. The period of loan repayment is also subject to new restrictions under the draft rules, wherein the facility term of lump-sum repayments may not exceed a period of 1 year. An additional provision requires the facility term to be significantly less than 1 year, at least a month for example, in order to prevent companies from evading the regulation via a technicality. Loan agreements where the payment structure is in the form of installments have not been subject to any similar restrictions as of yet.
  The class of loans exempted from these restrictions are personal loans for the operation of a business and working capital loans. However, even in those cases the draft rules require lenders to conduct re-evaluation and re-approval at least once a year to protect themselves against potential risks.
• Credit Reference Information
  Similar to the rules relating to traditional offline loans, the Consultation Paper places requirements of due diligence on lending institutions. What the new regulations bring is a two-step verification process of borrowers’ credit reference records. This two-step process is aimed at preventing borrowers from taking credit from different institutions and duplicate loans for identical funding purposes. The verification process is triggered whenever a borrower fails to utilise their loan within one month of the date of facility. Under this new mechanism two separate enquiries into the credit records of the borrower must be made by the lending institution. Such inquiries can only be made by lending institutions after they receive the requisite approvals.
• Protection of Consumer Rights
  Several provisions have been proposed in order to protect the consumer against unfair business practices by lending institutions. Companies are not allowed to check through product/ service bundling, so as to ensure that a consumer’s freedom of choice is unrestricted. In the past, a number of lending platforms falsely marketed credit services as a certain financial product, without responsibly disclosing the total product/ service package being sold. Another measure sought to be introduced which further shields consumers against risk is a removal of certain time limits imposed on consumers during the loan application process, allowing consumers to conduct comprehensive evaluations of the relevant service or institution. What has also been introduced is a specific procedure for contract examination to allow a consumer every opportunity to ensure that the transaction will not be disadvantageous to them. An additional disclosure requirement imposed on lenders is that of freely available and accessible information pertaining to the per annum funding costs of loans and the actual annual interest rates.
• Lending Institutions and Cooperating Institutions
  Several classes of institutions have been created by the Consultation Paper in order to ensure greater supervision and monitoring by different regulators. Lending institutions function alongside cooperating institutions which facilitate the operation of their business. The draft rules delineate the regulatory requirements of both, not permitting, for example, key loan application and post-loan procedures such as verification of credit reference information, identity verification of the borrower, principal and interest collection and suspension of payment, to be delegated to cooperating institutions alone. The entire process must be a collaborative one, among lending and cooperating institutions. What does need to be carried out by lending institutions independently are fundamental risk control and risk minimisation practices including, but not limited to, contract execution or credit approval. The creation and management of risk assessment models must not be outsourced, and is required to be handled internally.

The Consultation Paper comes after a tumultuous few years for the online lending sector. Online lending began in order to finance the under-financed and to allow individuals and small businesses to flourish. It allowed ‘savers’ to earn interest on their unused funds, and gave small borrowers greater access to the financial system. Hopefully the draft rules are a step in the right direction, finding a balance between under-regulation and over-regulation, protecting consumer interests while also allowing Fintech and financial service operators to grow.

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