Summary of Key Points
Recent claims that the new "assistance lending regulations" have set a 24% interest rate cap are misinterpretations of the policy. The new regulations do not specify any particular interest rate; instead, they require banks to include fees for credit enhancement services in the overall financing costs and to refer to judicial documents from the Supreme People's Court. The 24% mentioned in these judicial documents serves as a reference for courts to reduce interest rates when borrowers file lawsuits, but it is not a mandatory limit that financial institutions must adhere to. The logic behind regulating interest rates for financial loans and private lending differs significantly: financial loans are market-based with no mandatory upper limits, while private lending has legal protection limits. The current differential interest rate guidance from regulatory authorities lacks sufficient legal basis and transparency, and improvements in legislation could benefit by drawing on Japanese practices.
I. The True Intent of the New Assistance Lending Regulations: To Regulate Fee Transparency
Many people believe that the new regulations have imposed a 24% cap on loan interest rates, but the actual focus is on ensuring the transparency of fees, not on lowering interest rates. Article 6 of the new regulations states that banks must include all costs, such as credit enhancement and guarantee services, in the borrower's overall financing costs and clearly state these fees in the contract—in other words, to ensure that there are no hidden charges.
The regulations do not mention a specific figure of 24%; instead, they require that the overall financing costs comply with relevant Supreme People's Court guidelines. This is similar to a teacher providing students with reference materials for exams rather than creating new questions; the goal is for everyone to follow existing rules. Reports that claim the regulations set a 24% cap are misinterpreting the intent of the law.
II. The 24% Rate Is Not a Mandatory Limit for Financial Institutions, but a Reference for Court Mediation
Why does the public associate the 24% figure with the new assistance lending regulations? In 2017, the Supreme People's Court issued a judicial document stating that if borrowers believe the total of interest and penalties exceeds 24%, they can request the court to reduce it, and the court will support such requests. However, this document is not a legal mandate but rather a guide for court proceedings.
It is important to understand two key points:
1. It is not a mandatory requirement for banks: The 24% figure is for the court's use only. Banks can still set interest rates based on customer risk (e.g., higher rates for lower-risk borrowers) as long as the customers agree to the terms.
2. It is not a legal protection limit: Only private lending has such limits (currently set at four times the LPR, approximately 12%). Financial institution loans are market-based and do not have statutory upper limits. The 24% figure is merely a reference for court mediation.
III. Different Logic for Regulating Interest Rates in Financial Loans and Private Lending
There is often confusion between the interest rate rules for financial loans and private lending:
- Private Lending: If you borrow from friends or unlicensed lenders, there are no strict regulations, so laws have established a legal protection limit (currently four times the one-year LPR). Interest rates above this limit are not supported by the court.
- Financial Loans: Banks, consumer finance companies, and licensed lenders are under strict regulatory oversight, and interest rates are market-based. In 2013, the central bank abolished the upper and lower limits on loan interest rates, allowing banks to set their own rates (e.g., 5% for high-quality customers and 15% for higher-risk ones).
In summary, private lending has limits to protect borrowers from unfair charges, while financial loans are market-based.
IV. Current Differential Interest Rate Guidance: Reasonable but with Issues
Regulatory authorities have different interest rate guidelines for various institutions, such as requiring consumer finance companies to lower rates to below 20% and small loan companies to reduce them to four times the LPR by the end of 2027. These guidelines make sense given that different institutions serve customers with varying levels of risk. However, they face several issues:
1. Lack of Legal Basis: Current laws do not authorize regulatory authorities to set interest rate limits; market-based rates are the prevailing trend.
2. Transparency Issues: Guidance is often provided privately without public input, which lacks transparency.
3. Arbitrage Opportunities: If one institution is required to keep rates below 20% while another can charge up to 24%, customers may choose the latter, potentially shifting risks to less regulated institutions.
4. Inconsistent Signals: The court's reference to 24% and regulatory requirements of 20% create confusion for institutions.
V. Learning from Japanese Practices: Using Law to Establish Clear Interest Rate Rules
To address these issues, we should follow Japan's example of using law to establish clear interest rate rules rather than relying on administrative guidance. Japan previously had a dual system with different upper limits for civil and criminal cases, which led to loopholes. They revised the "Loan Business Act" to unify the limits at 20% and implemented additional measures such as restricting total loan amounts to one-third of annual income and banning aggressive debt collection.
Implications for China:
1. Legislation for Clear Standards: Clearly define interest rate regulations in laws such as the "Commercial Bank Law" or the "Financial Consumer Protection Law."
2. Unified Logic: Different institutions can have varying rates, but basic principles should be consistent (e.g., both should reflect market and customer risk).
3. Transparent Procedures: Make regulatory guidelines public for discussion by all stakeholders.
4. Dynamic Adjustment: Interest rate standards should be adjusted regularly based on economic conditions.
Conclusion
The new assistance lending regulations do not set a 24% cap; the 24% figure is merely a reference for court mediation. Financial loan interest rates are market-based. While current differential guidance is reasonable, it needs to be formalized through legislation to protect consumers and promote the healthy development of the financial market. Market-based interest rates do not mean no regulation; rather, they require governance within a legal framework to balance fairness and efficiency.