China's top court clarifies rules on private loans

China's top court has modified rules on handling disputes related to private loans in a bid to meet the need of the country's economic development, improve vitality of market entities and regulate private lending activities.

Private loans, with easier lending procedures, have satisfied various financial demands and played a big role in helping small and medium-size enterprises alleviate financing difficulties for a long time, "but with changes in the economy, some problems have emerged in the sector," said He Xiaorong, a member of the judicial committee with the Supreme People's Court.

He made the remarks while explaining a revised guideline at a press conference on Thursday afternoon. He said the revision aims to implement reform of the financial system, motivate market entities and keep stable and healthy development of private loans.

Under the revised guideline, Chinese courts will give legal protection for individuals and companies providing loans at or below four times the loan prime rate (LPR), a market-based benchmark lending rate.

For example, the current LPR, issued by the People's Bank of China on July 20, is 3.85 percent, so four times of it is 15.4 percent.

It means if two people go to a court over a dispute of private loan contract in which the lending interest rate is at or below 15.4 percent, the court will protect the contract, support the lender and order the borrower to pay back the money.

"But it doesn't mean the legally recognized interest rate on private loans is always 15.4 percent. Instead, it's a floating or flexible rate, depending on the LPR that is issued by the PBOC on the 20th of every month," said Liu Min, deputy chief judge of the top court's No 1 Civil Adjudication Tribunal.

The rate is lower than that of the old guideline. Previously, the legally recognized interest rate on private lending was 24 percent.

The adjustment will contribute to boosting the high-quality development of small and medium-sized enterprises, helping them solve the problems in financing, He said.

He added that revising the guideline was also to carry out the country's Civil Code, which was adopted by the National People's Congress in May and clarifies the prohibition of loan sharking.