China to Strengthen Personal Loan Management

The China Banking Regulatory Commission (CBRC) issued draft regulations on Wednesday that aim to further regulate the issuance of personal loans from some of the country's financial institutions.

The draft regulations were posted on the CBRC's website and the commission is soliciting public comment on the proposed changes before a November 19, 2009 deadline.

The regulations require that domestic banks do not to issue loans to individuals without first being aware of the use to which the loan will be put.

The draft regulations also require financial institutions to, in principle, transfer the principal of the loan directly to the final transaction partner that the borrower has agreed to pay. So in the case of a lender borrowing funds to purchase a house, the bank would deposit the funds directly into the account of the party selling the house, rather than that of the borrower.

However, this rule will only be strictly enforced in relations to loans that exceed 300,000 yuan.

A source from the CBRC revealed that the rule is aimed at enhancing the prudent management of personal loans and also ensuring that funds flow into the real economy.

The new draft regulations do not raise the threshold required of individuals applying for loans, the source added.

The draft rule will not apply to bank loans issued to farmers nor will they apply to loans that auto financing companies offer to individuals or credit overdrafts.

Over the past two years, the personal loan business of China's financial institutions has grown rapidly.

For instance, in just the first half of this year, new loans issued to individuals reached 650.8 billion yuan, 391.7 billion yuan more than that recorded in the same period last year.

However, the country is still lacking a unified set of regulations to govern the industry. 

These draft regulations were announced amid concerns that a percentage of personal loans were being used to fund speculation rather than investment in the real economy, increasing the risks of asset bubbles and bad loans. 

Links and Sources
China Banking Regulatory Commission: Draft Regulations (Chinese)
Economic Observer: Chinese-language Report
Xinhua: Image