Loan interest rate capped

Although the small-sum loan companies will operate on the market-oriented principle, they are not allowed to practice usury or freely decide their loan interest rates. According to the May regulations, their loan interest rates cannot exceed the upper limit set by relevant authorities and the lower limit that was set at 0.9 times the benchmark lending rate released by the PBOC. The floating range should be decided by the market.

"If this scheme goes on well, there will be more small-sum loan companies in Zhejiang," a source told the newspaper, saying that the government of Zhejiang will gradually allow more companies from January next year based on the implementation situation.

Analysts connect the government's active moves with the current economic situation. The possible rupture of the capital chain of SMEs and surging hot money inflows have both driven the government to speed up promoting the development of small-sum loan companies.

"By setting up small-loan companies, the government can gain experiences as soon as possible and further expand the pilot scheme," a researcher said.

In a government document obtained by the newspaper, the government clearly wants to "increase the loan supply to minisize businesses and agriculture-related businesses" and states that it will "gradually enlarge the business scope of small-sum loan companies based on the experiences gained in order to improve financial services in rural areas and regulate and direct private financing activities."

Although the pilot scheme will be expanded in the near future, most companies preferred to be among the first wave.

"It's best to be among the first batch, because the government may further tighten the policies on small-sum loan firms in the future," said Fang Peilin.

The government has also banned these companies from illegally raising funds and absorbing deposits from the public and granting loans to its shareholders. And they need to adhere to the principle of "small sum and dispersiveness", which requires them to grant 70 percent of the company's net capital to borrowers whose balance of loans is no more than 0.5 million yuan and to grant the remaining 30 percent to borrowers whose balance of loans cannot exceed 5 percent of the net capital.