Hot spots. The upper limit of judicial protection of private lending interest rates determined by the Supreme Court is not a fixed value of 15.4 per cent.

On the afternoon of August 20, 2020, the Supreme Law convened the Supreme People's Court on the Amendment.<关于审理民间借贷案件适用法律若干问题的规定>At the press conference of the "Decision", the Supreme People's Court, on the basis of carefully listening to the opinions of all sectors of society and soliciting the opinions and suggestions of the financial regulatory authorities, decided after discussion by the trial committee of the court:

The People's Bank of China authorizes the National Interbank Funding Center to issue four times the one-year loan market quotation rate (LPR) on the 20th of each month as the standard to determine the upper limit of judicial protection of private lending interest rates, replacing the original "24% The two lines and three zones based on 36% and 36%" regulations greatly reduce the upper limit of judicial protection of private lending interest rates, promote private lending rates to gradually adapt to the actual level of China's economic and social development.

According to the "Supreme People's Court Press Conference Materials of 20 August 2020", hereinafter referred to as "Press Conference Materials", the provisions on the upper limit of judicial protection of private lending interest rates are summarized as follows:

1. The upper limit of judicial protection for private lending interest rates is not a fixed value of 15.4. The 15.4 mentioned in the Press Conference Materials is only an example of the one-year loan market quotation rate of 3.85 released on July 20, 2020. The upper limit of judicial protection for private lending interest rates is not always four times that of 3.85, unless the one-year loan market quotation rate remains at 3.85.

2.LPR is published once a month, and the term of private lending is generally published across multiple months, arguing that interest should be calculated at the one-year loan market quotation rate at the time of the establishment of the contract. It should be noted that for private lending contracts where both borrowers and lenders are natural persons, the contract is established when the lender delivers the loan to the borrower, and the one-year LPR at the time of delivery of the loan should be the standard when determining the judicial protection limit of the private lending interest rate.

3. In calculating interest on private lending, even if the term of the loan exceeds 5 years, the one-year loan market quotation rate is still used for the calculation of interest.

4. The sum of the overdue interest rate, default payment and other expenses agreed by the parties shall not be higher than the judicial protection limit of the private lending interest rate, I .e. 4 times the one-year loan market quotation rate (LPR).

5. On the issue of retroactivity. According to the Supreme People's Court's Amendment.<关于审理民间借贷案件适用法律若干问题的规定>The new judicial protection upper limit of private lending interest rate will be implemented from August 20, 2020, that is, the first-instance private lending dispute cases accepted by the people's court after August 20, 2020, and the lending occurred on August 20, 2019 or later, apply to this provision; If the loan occurred before August 20, 2019, the upper limit of the protected interest rate can be determined by referring to four times the quoted interest rate of the one-year loan market at the time of the plaintiff sued.

In cases of private lending disputes that have been accepted in the first and second instance stages, the judicial protection ceilings of private lending interest rates still apply at 24 per cent and 36 per cent.

Picture

Supreme Court August 20, 2020
Full text of press conference materials
Pursuant to the Amendment of the Law on Amendments adopted at the 1809th meeting of the Judicial Committee of the Supreme People's Court on August 18, 2020<关于审理民间借贷案件适用法律若干问题的规定>Today, the Supreme People's Court officially issued the newly revised "Regulations".

Private lending is a civil legal act concluded between other civil subjects other than financial institutions with loan business, with the lending of funds and the return of principal and interest as the main rights and obligations. For a long time, private lending, as an important part of the multi-level credit market, has brought a lot of convenience to the people's production and life by virtue of its flexible form, simple procedures and fast financing, and has met the diversified financing needs of the society. to a certain extent, it has also alleviated the financing difficulties and expensive financing problems of small and medium-sized enterprises. In order to implement the relevant requirements of the Third Plenary Session of the Eighteenth Central Committee of the Communist Party of China on the reform of the financial system, the Supreme People's Court promulgated the "Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases" in August 2015. Since the implementation of the "Regulations", it has not only regulated private lending behavior, unified the standards for the application of the law, but also solved a large number of substantive and procedural issues in private lending disputes, which have received widespread attention and high recognition from domestic and foreign media. It is generally believed that the judicial interpretation conforms to the trend of China's economic development, conforms to the direction of China's financial reform, and implements the relevant arrangements of the third Plenary session of the 18th CPC Central Committee on the reform of the financial system. it is of far-reaching significance for speeding up the sunshine process of private lending. But at the same time, we should also see that with the development and changes of economy and society, some new situations and new problems have emerged in private lending, such as high interest rates, too wide scope, fuzzy boundaries, and so on. Some deputies to the National people's Congress, members of the Chinese people's political Consultative Conference, and representatives of entrepreneurs have repeatedly proposed to revise and improve the judicial policy of private lending. The Supreme People's court attaches great importance to this. Since 2017, it has successively gone to Zhejiang, Jiangsu and other places to investigate the problems existing in the implementation of the judicial interpretation of private lending, extensively listened to the opinions of private enterprises and individual industrial and commercial households, and issued the notice of the Supreme People's Court on properly hearing private lending cases according to law (2018) No. 215 in August 2018, the relevant judicial policies have been improved on the proper trial of private lending disputes and the prevention and resolution of various risks.

Since the beginning of this year, the new coronary pneumonia epidemic has had a huge impact on China's economy and the world economy, many small and medium-sized enterprises and individual businesses in China are facing unprecedented pressure, and excessive financing costs are one of the important reasons. In order to comprehensively promote normalized epidemic prevention and control and healthy economic and social development, continuously enhance the development momentum and vitality of market entities, maintain a reasonable growth in the scale of social financing, and promote a significant reduction in comprehensive financing costs, the Supreme People's Court has conducted careful research and extensively listened to the opinions and suggestions of NPC deputies, CPPCC members, entrepreneurs representatives, experts and scholars, and financial regulatory authorities, in accordance with the latest spirit of the the People's Republic of China Civil Code, decided to amend the "Regulations", mainly in the following three aspects:

The first is to respect the autonomy of the parties and to confirm and protect the validity of private lending contracts in accordance with the law.

Respecting the autonomy of the parties is an important principle that should be adhered to in dealing with private lending disputes. As a form of loan contract, private lending should adhere to the principle of voluntariness, that is, the borrower and the lender have the right to establish, change and terminate the civil legal relationship according to their own will. The borrower and the lender may voluntarily negotiate the term of the loan, the calculation of interest, the overdue interest and the termination of the contract, and voluntarily bear the corresponding legal consequences. Only by abiding by the principle of voluntariness can we give full play to the positive role of private lending in financing and activating the market. Similarly, private lending, as a civil subject, shall not violate the mandatory provisions of laws and administrative regulations, and shall not violate public order and good customs. In the process of preliminary investigation and soliciting opinions, people from all walks of life have great opinions on the behavior of issuing loans to the public in the name of "private lending" without the approval of the financial regulatory authorities. such behavior is easy to be intertwined with "routine loans" and "campus loans", seriously affecting the local financial order and social stability, and seriously damaging the legitimate rights and interests of the people and the peace of life. After careful study, the Supreme People's Court absorbed this opinion and added one of the five cases in which the people's court found the loan contract to be invalid, that is, the third paragraph of Article 14, "A lender who has not obtained the qualification to lend in accordance with the law shall be deemed to be invalid if it provides loans to unspecified objects in society for profit. The above amendments are based on Article 4 of the State Council Order No. 247 of 1998 "Measures for Banning Illegal Financial Institutions and Illegal Financial Business Activities" (revised in 2011), that is, activities that illegally grant loans without the approval of the People's Bank of China are illegal financial business activities., Belonging to the category that should be banned according to law. In addition, when discussing with private entrepreneurs and individual industrial and commercial households, most representatives suggested that the behavior of re-lending should be strictly restricted, that is, some enterprises re-lending after obtaining loans from banks, especially a small number of state-owned enterprises to engage in loan channel business after obtaining loans from banks, which violates the value orientation of financial service entities. The judicial committee of the Supreme People's court adopted this opinion after careful discussion, and decided to amend the invalidity of the contract in the first item of Article 14 of the original judicial interpretation, which "takes the credit funds of financial institutions and then lends them to the borrower at a high interest rate, and the borrower knows or should know in advance", It further strengthens the clear attitude of judicial promotion of financial service entities.

The second is to adjust the judicial protection ceiling of private lending interest rates and promote private lending interest rates to adapt to the level of economic and social development.

The interest rate of private lending is the core element of private lending contract, and it is also an important boundary between party autonomy and state intervention. On the basis of carefully listening to the opinions of all sectors of society and soliciting the opinions and suggestions of the financial regulatory authorities, the Supreme People's Court decided after discussion by the trial committee of the court: the People's Bank of China authorized the National Interbank Lending Center to issue one-year loan market The quoted rate (LPR) is 4 times as the standard to determine the judicial protection ceiling of the private lending interest rate, to replace the provisions of "two lines and three zones based on 24% and 36%" in the original "Regulations", the judicial protection ceiling of private lending interest rates will be greatly reduced, and private lending interest rates will gradually adapt to the actual level of my country's economic and social development. Taking four times the 3.85 per cent quoted rate for one-year loans issued on July 20, 2020 as an example, the judicial protection cap for private lending rates is 15.4 per cent, a significant decrease from 24 per cent and 36 per cent in the past.

The main reasons for greatly reducing the judicial protection ceiling of private lending interest rates are as follows:

One is the objective requirement of economic and social development. With the transformation of China's economy from the high-speed growth stage to the high-quality development stage, the financial and capital markets should serve the advanced manufacturing industry and the real economy. In the medium and long term, stimulating the vitality of micro-entities such as small and micro enterprises will help promote high-quality economic development and ultimately contribute to the long-term sustainable development of the real economy. Private lending is inextricably linked with small, medium and micro enterprises, reducing the financing costs of small, medium and micro enterprises and guiding the overall market interest rate downward is an important measure to restore the economy and protect the main body of the market.

The second is the objective need to regulate private lending activities. The interest rate of private lending belongs to the category of party autonomy. Whether the borrower agrees on interest and how much interest is agreed upon should be done on a voluntary basis and through a loan contract. If the loan contract does not provide for the payment of interest, it is considered to be free of interest. If the interest agreed upon by the borrower and lender in the loan contract does not violate the relevant provisions of the State and does not violate public order and good customs, it shall be protected in accordance with the law. However, if the interest rate agreed by the parties is too high, it will not only lead to the debtor's failure to perform, but may also cause other social problems and moral hazard. Therefore, most countries in the world have set the upper limit of interest rate protection. Therefore, it is of great significance to greatly reduce the judicial protection ceiling of private lending interest rate for guiding and regulating private lending behavior.

The third is the need to ensure the steady and healthy development of private lending. As a necessary supplement to the country's formal finance, private lending must not violate the law or public order and good customs. In recent years, some private lending in the name of financial innovation to avoid financial supervision, institutional arbitrage, and some even with the network lending, capital management plan, over-the-counter capital allocation, asset securitization, equity crowdfunding and other financial phenomena intertwined, increasing the private lending dispute cases of the stakeholder and complexity. In the long run, greatly reducing the judicial protection ceiling of private lending interest rates is conducive to the stable and healthy development of Internet finance and private lending.

Fourth, it is an inevitable requirement to promote the reform of interest rate marketization. The ideal interest rate standard should be developed by the market. With the rapid development of Internet technology and the continuous improvement of China's credit information system, the financing cost of the whole society is bound to gradually decline, and the interest rate of private lending will gradually stabilize with the expansion of national inclusive finance. Therefore, an excessively high interest rate protection ceiling is not conducive to creating an external environment for interest rate market reform, nor is it in line with the direction of interest rate market reform.

Fifth, the practical needs of unified judicial standards. In recent years, more than two million cases of private lending disputes have poured into the people's courts every year. Under the circumstances that the current laws or administrative regulations do not specifically regulate the interest rate standard of private lending and the people's courts cannot "refuse to judge", how to delimit the upper limit of judicial protection of interest rates is a prerequisite for the people's courts to handle private lending cases fairly and fairly. Therefore, it is necessary to follow the trend of economic development and revise the judicial interpretation of private lending in a timely manner to provide more specific and clear adjudication standards and relief channels for private lending disputes.

It should be recognized that the judicial protection cap on private lending rates is not as low as possible. For a long time, the upper limit of judicial protection of interest rates has been the focus of debate when the community discusses the issue of private lending. The high interest rate protection cap not only fails to protect the borrower, but also has credit risk and moral hazard. However, too low a cap on interest rate protection may also have two consequences: first, borrowers do not have enough credit in the market, and credit supply is in short supply, exacerbating the tension between supply and demand for funds. Second, private lending has shifted from above ground to underground, and underground banks and shadow banks may be more active. To compensate for the cost of legal risk, the real interest rate on private lending may rise further. Therefore, maintaining the upper limit of judicial protection of private lending interest rates within a relatively reasonable range is the greatest common divisor formed after absorbing opinions from all walks of life, which is more in line with the objective needs of China's current economic and social development.

Third, conscientiously implement the Civil Code and promote the steady and healthy development of private lending norms

Article 680 of China's Civil Code clearly stipulates that "usury lending is prohibited, and the interest rate of borrowing shall not violate the relevant provisions of the State." In accordance with the relevant provisions of the People's Bank of China Law, the various interest rates approved by the State Council and authorized by the State Council to set by the People's Bank of China are legal interest rates. The head office of the People's Bank of China is responsible for the publication and implementation of the statutory interest rate. In practice, the relevant interest rate standards formulated by the People's Bank of China regulate and restrict the lending activities of financial institutions subject to state financial supervision, while the People's Bank of China has no special regulations on private lending rates unrelated to financial institutions. On January 31, 2002, the People's Bank of China issued and came into effect on the same day. Article 2 of the "Notice of the People's Bank of China on Banning Underground Banks and Combating Usury" stipulates: "Strictly regulate private lending. Private individual lending activities must strictly abide by the relevant provisions of national laws and administrative regulations, and follow the principles of voluntary mutual assistance, honesty and credit. In private individual lending, the lender's funds must be their own monetary funds belonging to their legitimate income, and it is prohibited to absorb other people's funds to lend. The interest rate of private individual lending shall be determined by both parties through negotiation, but the interest rate negotiated by both parties shall not exceed 4 times the interest rate (excluding floating) of the same period and grade loan interest rate of financial institutions announced by the People's Bank of China. Exceeding the above criteria should be defined as high-interest lending." With the advancement of China's financial interest rate market reform, the People's Bank of China has gradually liberalized the interest rate decision-making power of financial institutions, has canceled the publication of the benchmark interest rate, and issued an announcement on August 17, 2019 to reform and improve the loan market quotation rate (LPR) formation mechanism. The interest rate of 24 per cent set in the original Regulations was calculated at four times the prevailing base rate of about 6 per cent. The benchmark interest rate no longer exists, so it is necessary to make corresponding amendments to the judicial interpretation in accordance with the changes in China's monetary policy control mechanism.

In the process of revising the judicial interpretation, the Supreme people's Court conscientiously implemented the spirit of the principle of "prohibiting usury lending" in the Civil Code, and made corresponding adjustments to the relevant provisions.

One is to continue to implement a more stringent principal and interest protection policy. That is, if the sum of the principal and interest payable by the borrower after the expiration of the borrowing period exceeds the sum of the interest for the entire borrowing period calculated on the basis of the initial borrowing principal and four times the market quoted interest rate for the one-year loan at the time of the establishment of the contract, the people's court shall not support it.

Second, the overdue interest rate agreed by the parties shall not be higher than the judicial protection limit of the private lending rate. That is, if the borrower and lender have an agreement on the overdue interest rate, it shall be agreed upon, but not more than four times the market quoted interest rate for one-year loans at the time of the establishment of the contract.

Third, the sum of the overdue interest rate, default payment and other expenses claimed by the parties shall not be higher than the judicial protection limit of the private lending interest rate. That is, the lender and the borrower have agreed on both the overdue interest rate and the liquidated damages or other fees, and the lender may choose to claim the overdue interest, liquidated damages or other fees, or they may claim them together, but the people's court will not support the part that exceeds four times the quoted interest rate of the one-year loan market at the time of the establishment of the contract.

As a useful supplement to the country's formal finance, private lending needs both regulation and protection. In the face of the current complex and severe economic situation, especially under the new development pattern of accelerating the formation of the domestic cycle as the main body and the domestic and international double cycle promoting each other, the scale and scope of the private lending market will continue to grow steadily. We must be guided by Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era, always adhere to the new development concept, firmly grasp the strategic basis of expanding domestic demand, vigorously protect and stimulate the vitality of market players, promote high-quality economic development, and do a solid job in the "six stability" Work, fully implement the "six guarantees" tasks, and provide more powerful judicial services and guarantees for coordinating epidemic prevention and control and economic and social development.