China’s new rules aimed at cleaning up the cash loan market is expected to bring a massive shake-up to the industry, with thousands of unlicensed businesses to be impacted, according to analysts.
There are an estimated 2,000 to 5,000 cash loan companies in the market, of which only dozens are licensed, Xinhua-run Economic Information Daily reported.
Under the new rules specified by the regulators on Dec 1, those unlicensed platforms with high lending interest rates and abusive debt collection have been defined as illegal and will have to leave the market in the future, according to Yin Zhentao, a researcher with the Chinese Academy of Social Sciences.
Some established players will need to transform their business models to survive, Yin said.
In its latest effort to rein in risks from the fast growing, loosely regulated cash loan industry, China’s financial regulators issued a notice that bans unlicensed firms or individuals from carrying out lending business.
The borrowing costs should comply with the regulation on the interest rate of private lending as stipulated by the Supreme People’s Court, with the maximum annual rate set at 36 percent.
The regulators will also halt new approvals of online micro lenders and cross-region lending businesses.
China’s micro-lending market has seen explosive growth in recent years, as lending platforms offer easy cash loans to needy consumers.
While such firms have helped meet the financing demands of some, the industry’s relentless growth and lack of regulation have left lenders and borrowers both unprotected, and there are frequent reports of defaults and malicious debt collection.
Some firms have kept their annualized rate under 36 percent by charging borrowers extra fees, an act that could mislead consumers and was banned by the new rules.
Although the notice required cash loan businesses inform borrowers of the actual borrowing cost can make it harder for loan providers to profit from hidden charges, analysts believe that the scope the new rules cover has exceeded market expectations, and its implementation will not be instant, leaving room for companies to transform their business models.