On August 20, 2020, the Supreme People’s Court issued the Decision of the Supreme People’s Court on Amending the Provisions on the Application of Law in Private Lending Trials (the “Decision”), which entered into effect on August 20, 2020. This article briefly introduces the important amendments.
First, the Decision amends Article 26 regarding private lending rates, under which the court-supported interest rate for a loan shall not exceed four times the interest rate in the one-year loan market at the time of the contract. The “interest rate in the one-year loan market” refers to the annual interest rate quoted for one-year loans as announced every month by the National Interbank Funding Center since August 20, 2019 under the authorization of the People’s Bank of China. This changes the 2015 Provisions of the Supreme People’s Court on the Application of Law in Private Lending Trials (“2015 Provisions”) regarding interest rates less than or equal to 24% and between 24% to 36% for natural debts, are amended, thereby greatly reducing the lending rates for private lending and providing legal protection for low-interest financing by various civil entities.
Second, Article 14 of the Decision relaxes the circumstances under which a private lending contract is deemed invalid, including (1) deleting the requirement in the 2015 Provisions for the borrower to know or should have known in advance regarding obtaining a loan from a financial institution for further lending, (2) adding “loans of funds obtained through illegal absorption of deposits from the public”; and (3) adding “a lender providing for-profit loans to unspecified targets in the public without a lawful lending qualification.”
Article 32 of the Decision stipulates the scope of the Decision’s application. The Decision will only be applicable to first instance private lending cases accepted after August 20, 2020, and will not be applicable to first, second or retrial instances that were accepted before August 20, 2020, nor cases accepted after August 20, 2020 that are not first instance cases. In particular, for the first-instance private lending cases accepted after August 20, 2020, if the borrowing occurred after August 20, 2019, the Decision’s cap on the protected interest rate at four times the interest rate of one-year loans in the market at the time of complaint will directly apply. For borrowing that occurred before August 20, 2019, the aforementioned cap on the protected interest rate in the Decision may be used as a reference for the cap on the protected interest rate.