On August 20, 2020, the Supreme People’s Court of China issued the newly revised “Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases” (the “Provisions”). The Provisions amend the judicial protection ceiling on private lending interest rates, setting the new ceiling at four times China’s one-year Loan Prime Rate (LPR) issued by the National Bank Funding Center on the 20th of each month, replacing the “two lines and three zones based on 24% and 36%” in the original provision.
What are the major changes in this amendment? Taking the one-year LPR of 3.85% released on July 20, 2020 as the example, the new ceiling on private lending interest rates is 15.4%. If the interest rate agreed upon by both parties exceeds the ceiling, it will no longer be protected as natural debt, the debtor has the right to request the restitution of the interest on the part exceeding the four times one-year LPR. In the past, the Court supported the interest rates up to 24%, and the debtor had the right to request the restitution of the interest on the part exceeding the annual interest rate of 36%.
Since LPR is changing from month to month, in the event of a dispute, how can we judge whether the agreed interest rates exceed the ceiling? According to the provisions, the LPR at the time of establishing the private loan agreement should be taken as the standard, rather than at the time of the court judgment after the occurrence of the dispute. In this way, we can avoid the agreed interest rates beyond the ceiling at the time of both parties’ executing the agreement.
What if the agreed interest rates and liquidated damages are in the same agreement? This is quite common in practice. The Provisions still follow the old rule. The creditor has the right to claim interest rates, liquidated damages, handling fees, etc., together. However, the total annual interest rate in the agreement should strictly follow the 4 times one-year LPR limitation.
What about the private loan agreement that has already been executed before August 20, 2020? It is probably good news for the debtor if the agreement has not been accepted into the court. The interests on the part exceeding the four times one-year LPR will not be protected. Therefore, if the agreed interest rates exceed the ceiling, the debtor just needs to fulfill the payment obligations based on the four times one-year LPR limitation. If the case was filed before August 20, 2020 the interest rates up to 24% will still be admitted by the court.
2020 is deemed to be a hard year for foreign companies operating in China. A lot of companies are under financing pressure. Reducing the private lending interest rates to some extent can help companies get through these difficult times. If you encounter any relevant financing legal issues, please consult lawyers in time to make the right decision.