China’s efforts to curb predatory lending to the country’s small and medium-sized enterprises could harm the sector rather than helping it by cutting off access to crucial finance, analysts have warned, reported the Financial Times.
Multiple shadow banking lenders have told the Financial Times they would stop servicing medium to high-risk borrowers after the Supreme Court announced a plan last month to “significantly” cut the interest rate shadow banks could charge. The figure could fall to as low as 15% a year from 24%, affecting nearly RMB 7 trillion ($1 trillion) in outstanding loans, according to FT sources involved in developing the rules.
Beijing hopes the move will prevent SMEs, which are a significant employer, from falling victim to exorbitant interest rates. But analysts warned the rules would make underground loans, a lifeline for many small businesses with little access to traditional bank lending, harder to obtain.
“Interest rate control ends up hurting the very group of borrowers it intends to protect as they are priced out of the market,” said Zhang Min’an, a law professor at Sun Yat-sen University in Guangzhou.