In an attempt to place some control over the country's underground banking and lending businesses, the Chinese government has now imposed a new rule that will officially be taking effect this week.
Under the new rule, any company or individual caught lending money with an annualized interest rate of more than 36 percent can now be prosecuted and charged with a criminal offense.
China aims to use the rule to place the country's exceedingly rampant underground lending sector under control. Interest rates charged to borrowers by these often unregistered businesses do often exceed 36 percent per year.
This results in a number of unwanted legal actions and is prone to rampant abuse.
The details of the new rule were presented in a joint ruling issued on Monday by China's Supreme Court, Supreme People's Procuratorate, the Ministry of Public Security and the Ministry of Justice.
Under the rule, any person or entity that lends money to more than 10 borrowers within two years for profit will be subject to an accounting of its total profits. Those that are found to have profits at an annualized interest rate of more than 36 percent will be charged with conducting illegal business operations.
The severity of the penalties has been divided into brackets based on the amount that was lent by the individual or entity. Those who have lent up to 2 million yuan, or $283,000, and generated profits of more than 800,000 yuan, or $113,000, could be facing jail time of up to five years.
Harsher penalties will be imposed on people or entities found to have loaned higher amounts and generated higher profits. The calculation of the profits will take into account all the fees paid by the borrower to the lender, which will include agency fees, management fees, default penalties, and consultation fees.
The ruling also stated that those who have been found to have lent money to more than 50 borrowers can be prosecuted. Persons or entities providing loans that have resulted in "suicide, death, or madness" of the borrower or any of his or her family members may also be prosecuted.
The newly implemented rule is part of China's continued efforts to curb the rapid growth of private borrowing and lending. The spread of China's version of payday loans has caused quite a lot of issues and concerns amongst citizens, the government, and local businesses. These types of short-term high-interest loans often lead to violent and illegal debt collection practices, with some ending in criminal activities.
