Comprehensive new regulations target personal loan business

The National Administration of Financial Regulation released the Measures for the Administration of Personal Loans on 2 February 2024, which will officially take effect on 1 July 2024, replacing the interim measures previously in effect. The measures serve as an important compliance guideline for banking and financial institutions engaging in personal loan businesses. Relevant institutions should pay full attention to this document. This article provides a brief interpretation of certain aspects of the measures.

Clarifying concepts related to personal loan business. The measures define personal loan business as loans granted by lenders to eligible individuals for personal consumption, production or other purposes, in domestic or foreign currency.

Additionally, article 8 further specifies loan terms, stating that the loan term for personal consumption should not exceed five years, while loans for production or business purposes generally should not exceed five years, with a maximum extension of up to 10 years.

Establishing a comprehensive loan system. The measures enhance requirements for lenders to establish robust loan investigation, risk assessment mechanisms and borrower credit risk evaluation systems to ensure the authenticity and effectiveness of loan investigations.

Lenders must safeguard borrower interests during investigations and clarify qualifications for third-party collaborators, implementing list management mechanisms to enhance oversight through admission and exit procedures. Additionally, lenders are prohibited from outsourcing core risk control tasks.

The measures also mandate lenders to designate departments and positions responsible for risk assessment. When evaluating loan risks, lenders must employ quantitative and qualitative analysis methods, conducting comprehensive, dynamic and prudent assessments of borrower credit status, repayment capacity, income, expenditure and debt situation.

For loans intended for production operations, lenders should analyse borrower business and risk conditions. Furthermore, the measures emphasise that lenders must not determine loan amounts and terms solely through guarantee methods, but should prioritise a comprehensive assessment of borrower repayment ability.

Lenders are required to establish and improve borrower credit risk evaluation systems, monitor borrower financing situations and establish a unified credit management system for individual clients, adjusting these as necessary based on business development and risk control needs.

Additionally, the measures continue requirements for lenders to establish a mechanism for managing the entire loan process and a risk limit management system for personal loans.

Increasing provisions for the use of information technology. In response to the continual development of information technology, the measures provide corresponding regulations for lenders’ use of information technology, offering standardised guidance.

First, article 16 of the measures affirms that lenders may conduct loan investigations using digital electronic methods or other non-face-to-face indirect investigation means, excluding loans exceeding RMB20,000 (USD2,700) or those intended for personal housing purposes.

Second, article 18 stipulates that lenders may conduct video interviews with borrowers through their own platforms if they can effectively verify borrowers’ identities and relevant information, except for loans for personal housing purposes.

Third, article 21 affirms that lenders may perform automated approvals online, provided they establish a manual review mechanism as a supplement, with conditions triggering a manual review. If automated approvals are found ineffective in identifying risks during post-loan management, lenders should halt the automated approval process.

Finally, electronic loan contracts are recognised in article 26, with lenders permitted to sign relevant contracts and documents through electronic banking channels, except for loans exceeding RMB20,000, or those used for personal housing purposes.

Enhancing post-loan management. First, article 27 of the measures mandates that lenders stipulate in loan contracts the consequences for borrowers failing to fulfil their contractual obligations or defaulting, along with the corresponding remedies to be taken.

Concurrently, article 39 requires lenders to intensify monitoring of borrowers’ fund misappropriation activities. If such misuse is detected, lenders should, as per contract terms, demand rectification, early repayment, or downgrade of loan risk classification.

Second, the measures provide detailed regulations on loan extensions for individual borrowers. Lenders must consider the reasons for the extension and the feasibility of subsequent repayment arrangements.

Extensions for a duration of less than a year should not exceed the original loan term, cumulatively. Extensions exceeding a year should not surpass half of the original loan term, cumulatively.

Finally, alternative measures such as transfer and write-off are introduced for unrecovered loans.

The introduction of the measures will significantly impact banking and financial institutions engaged in personal loan businesses. Hence, relevant institutions should thoroughly study the measures, promptly adjust their operations, and ensure prudent and compliant practices.

Guan Zhenming is a senior partner at Joint-Win Partners