Microlenders face scrutiny from PBOC Central bank halts approvals for new entrants to prevent risks

China’s financial regulator on Friday suspended the approval of new online microloan firms as well as new cross-province micro-lending business to clean up the rapidly growing but highly unregulated industry.

The People’s Bank of China, the country’s central bank, issued a comprehensive regulatory notice, requiring that financial institutions without proper licenses must be strictly banned from the business and that financial firms must not sell micro-loan products at illegal interest rates.

The crackdown is part of China’s broad effort to contain systemic financial risks and to maintain financial stability.

The central bank warned in the notice that acute problems such as excessive lending and borrowing, extremely high interest rates, improper debt collection and privacy infringement have emerged in the industry and they could lead to financial and social risks.

Online peer-to-peer lending platforms are also banned from offering loans to students and borrowers who do not have financial resources to pay back debts.

They are also prohibited from offering loans for property down payment, according to the notice.

The PBOC also urged the country’s financial institutions to take a prudent approach toward the business and to strictly abide by the principle of “know your client,” thereby protecting the interests of financial service consumers.

The regulator also warned about the risks in the rapidly growing online micro-lending business and vowed to crackdown on any illegal activities.

“Some cash micro-lenders are conducting the business in the gray area and problems such as usurious interest rates, unlicensed operation, illegal loans and violent debt collection have emerged,” Feng Yan, an official with the China Banking Regulatory Commission, said at a news conference in Beijing.

The intensive crackdown on the industry has cast a shadow on the prospect of Chinese online micro-lenders that are seeking initial public offerings in the United States. Share prices of firms such as Qudian Inc and PPDAI Group Inc plummeted after media reported the tighter regulations.

Xiao Xiang, head of the strategic research department of National Internet Finance Association of China, said different regulatory standards are set based on business segments and functions, and it is the first time to identify different business scopes targeting more effective supervision.