CBIRC Raises Leverage Limits for Microfinance Companies

Microfinance companies can issue standardised debts such as bonds and ABS products up to 4 times net assets, compared to 0.5 to 3 times net capital previously.

The CBIRC (China Banking and Insurance Regulatory Commission) has issued new rules for microfinance companies, allowing them to increase the leverage they take on to issue loans.

Under the new rules, standardised debts such as bonds and ABS products issued by microfinance companies can amount to as much as four times their net assets. They can also raise funds from nonstandardised debts such as bank loans and shareholder loans up to the value of their net assets.

Previously, total outstanding borrowings were capped at between 50 percent and three times net capital, depending on where the microfinance company was based. In practice, financial regulators in some regions such Shenzhen took net assets as a reference instead of net capital, according to a Caixin report.

The rules also clarify requirements for microfinance companies to improve service levels for key target customers – defined as small and micro enterprises, farmers, and urban low-income groups.

Microfinance companies should mainly engage in lending business, and regulate the concentration of loans, loan uses, and business areas, the CBIRC says. Specifically, the balance of loans to a single borrower should not exceed 10 percent of net assets; or 15 percent if including the borrower’s related parties.

Microfinance companies are required to monitor the use of the loans they extend to ensure they are not used to invest in stocks, financial derivatives, real estate or for other purposes prohibited by laws and regulations.

Microfinance companies are encouraged to lower interest rates charged on loans, and may not deduct interest, handling fees, management fees, or security deposits from the loan principal, the rules say.

The CBIRC also sets standards to improve business management of microfinance companies, specifically in relation to collections management, information disclosure, customer data, and supervisory cooperation.

At the end of December 2019, there were 9,074 microfinance companies nationwide, with a loan balance of about CNY 1 trillion.