Research On The Legal Regulations Of Non-Financial-Institution Lenders

In recent years, with the outbreak of civil financial cases and so many troublesfollowed, the civil finance becomes one of the most popular topics in the financialregulation. On one hand, as a useful complement to formal finance, the civil financeplays a very important role in supporting and promoting the development of SMEs;on the other hand, systemic crisis triggered by the civil finance many a timepunctures financial markets, and its negative effect is also a difficult situation thatcan not be avoided. The financial regulatory reform is now at a critical turning pointthat how to play marke’s function in allocation of resources at the same time to curbusury wind.In fact, regulatory bodies have legislative action intended to regulate civilfinance for a long time. However, confined to the double-sided characteristics andimmature legislative technique,“Money Lenders Act”&”General Rules for Loans(amendment)” what for the normalization of civil finance, now both are at astandstill. We consider that, recalling the history of Chinese financial regulatoryreform, there is little large-scale transformation, but to allow the new market playersdeveloped, developing step by step, constantly practicing and summing upexperiences, through a local, progressive, experimental way. Therefore, it is unlikelyto build the legal system of “money lenders” or”non-financial-institution lenders” ina period of time. Under the background of the legislative problems of civil finance, itis more practically and operationally to disinter the existing credit market entitiesand improve the corresponding rules for dredging civil finance. So, pawn companiesand small-sum loan companies go into the author’s vision. As the two existing formsof non-financial-institution lenders, although it is only a narrow door that the creditmarket opening up to private capital, the special status and institutional function areextremely very valuable. The research on the legal regulations of pawn companiesand small-sum loan companies in this article just aims at giving a more practical wayfor dredging civil finance. On this basis, through the criticism of the existing legaland regulatory system, the author put forward comprehensive reform proposals fromconcept to system, which make the pawn companies and small-sum loan companies play greater roles in dredging civil finance, easing the financing problems of SMEs,and building a multi-level credit market.The article consists of four chapters:In chapter I, the author forms his own understanding of civil finance byrevealing and learning from current theories. Civil finance here defined as allfinancial activities existed in the credit market that beyond regulation and control ofgovernment. The author provides three institutional explanation for the occurrence ofcivil finance, financial needs of credit market is the external motivating factor,low-cost mutual aid and capital appreciation needs is the internal motivating factor,and the unfair allocation of rights in credit market gives an explanation from the lawperspective. In section two of this chapter, the author focuses on the double-sidedfeature of civil finance. On the positive side, civil finance compensate for the lack inallocating rights, improving the efficiency of resource allocation, recuperating theinsufficient service by the formal financial institutions, and promoting formalfinancial sector to improve standards of their service. On the negative side, becauseof its loose, profit-driven, high-risk characteristics, civil finance is alwaysaccompanied by many negative effects. Through the research on the regulatoryhistory in china, we come to the agreement that civil finance is now experiencing theprocess from a high-pressure control to gradually loose regulation. But because ofthe systemic crisis caused by civil finance, reducing regulation is still anembarrassment to the financial markets supervisor. Under this regulatory dilemma,the dredging concept is gradually formed and reflects a correct understanding ofdouble-sided feature of civil finance.Three modes has been formed in the process of practicing dredging concept, thefirst is absorbing private capital into the formal financial institution; the second isestablishing a “money lender” system to replace the loose form of civil finance; thethird is to retain inherent informal forms of civil finance but give them the necessaryregulatory. Non-ninancial-institution lenders conception is also applicated in theabove process and showing its unique value.In Chapter II, during the process of practicing dredging concept, Chineselegislators and scholars gradually form the understanding of“non-financial-institution lenders”, and write it into the “2010General Rules forLoans (amendment)”(draft), so that non-financial-institution lenders system comeinto our vision, and been widely used. So it can be said that, non-financial-institutionlenders carry the heavy responsibility of dredging civil finance almost at thebeginning of it generated, and how to make it play more function in dredging civil finance is the entry point and the final destination of this study. In this part, theauthor discusses the practical significance of non-financial-institution lenders deeply,and points out that market player with characteristics of non-financial-institutionlenders has existed in Chinese credit market, that are small-sum loan companies andpawn companies. Through a careful research, we find that the original forms of pawncompanies and small-sum loan companies differ from the recently institutionalfunction of them in our county. If continuing to use the traditional idea to have aunderstanding of pawn companies and small-sum loan companies in modern society,we wiil be confused in related interpretations and disconnected with the reality ofpractice. So it is more applicable and practical that using non-financial-institutionallenders to cover the institutional function of pawn companies and small-sum loancompanies, and the two types of companies are just the existing forms ofnon-financial institution lenders in modern credit markets.The author develops the dredging function value of the non-financial institutionlenders from the following three aspects, absorbing private capital, alleviating thefinancing problems of SMEs, improving multi-level credit market system.For regulators, small-sum loan companies and pawn companies’ transparentoperating system is able to help them timely disposal financial risk and inhibit thenegative effects of hidden civil finance. For the market players, the legal status ofnon-financial-institution lenders can meet them the need for seeking to develop andenhance self-protection. According to the operating and regulatting flexibility, andalso the adaptability in the development stages, non-financial-institution will workbetter in dredging civil finance than financial institutions.So non-financial-institutionwill become an important choice in dredging civil finance.The spillover effects of SMEs’ financing needs is the main reason for theamplification of civil finance these years. So, we need to establish market playerswhich can provide standard financial services for SMEs in order to dredge civilfinance. Academic demonstrate the natural defects between bank loans and SMEs’financial needs from different angles, but the developing practice ofnon-financial-institution lenders has fully proved its coupling function to SMEs.Thus we should pay more attentions to the financial function ofnon-financial-institution lenders, and guide private capital to invest in this industry,so as to ease the financing problems of SMEs. This can form competition effect withcivil finance, which will reduce its profit margins. And after this process, civilfinance will come out from the underground market for justifiable developing.Defects of the financial markets and the resulting financial simpleness is an important reason for the outcome of civil finance. Therefore, the transition processof civil finance will be along with the constantly optimized procedure that financialmarkets change from imbalance towards balanced. Non-financial-institution lendersare different from large financial institutions in capital structure, service object,credit products etc, and it also make an orderly channel for the private capitalcoming into financial markets, that will be a great value to meet the social pluralismfinancing needs and build a multi-level loan market. This will also help to promotethe overall service level of our financial markets, strengthen financial deepening,reduce the number of financial disadvantaged groups, so as to curb the developmentof civil finance, and that will play a key role in dredging civil finance.In Chapter III, to further enhance the function of non-financial-institutionlenders in dredging civil finance, reduce the obstacles to its development caused byexisting rules, the author does a more comprehensive and systematic study on twonon-financial-institution lenders’ modern rules and regulatory systems, which is incombination with the author’s working practice, through the investigation of morethan10samples provinces. The author sums up the main weakness ofnon-financial-institution lenders’ legal regulations in five aspects. The first, legalposition of main regulatory rules and basis is so low that it can’t have the ability toprotect and promote the development of non-financial-institution lenders. Secondly,increasing market access standard will shut out much private capital and the unclearcriteria will increase the possibility of the abuse of power. The third, the excessivegovernment interventions in business scope, interest rate management, credit amountconstraints and corporate governance, have shown a great regulatory burden to thenon-financial-institution lenders. The fourth, with the follow-up funds insufficient,non-financial-institution lenders are lack of capacity in its own financing. The last,the direction of non-financial-institution lenders is not clearly developed in theinstitutional rules.On this basis, the author furtherly interpretate the misplaced regulatory conceptand insufficient regulatory capacity reflected by the weakness which is mentioned inthe previous paragraph. We have consensus that the complex reasons includ the biasof the target value system of financial regulation, the abuse of legal paternalism, thediscrimination of corporate identity and regulators’ lack of regulatory capacity.Therefor, we must reform current regulatory system from concept to rules in order todredge civil finance and have a further openness of our loan market.In Chapter IV, the author proposes a comprehensive regulatory reform proposalfrom concept to system. In the aspect of regulatory concept, we reached a few agreements. The first isthat the rights protected of non-financial-institution lenders should be elevated to aconstitutional level. The existence of non-financial-institution lenders protect thesurvival and development rights to citizens, and also reflects that the state recognizeand respect the citizens’ property rights. The system value is just protectingfundamental rights of The Constitution. Accordingly, non-financial-institutionlenders should be given more concerns and protective policies by regulators. Thesecond,“society-centered theory” and “balance-coordination theory” should beintegrated into the regulatory concept of the non-financial-institution lenders,regulators need to maintain the stability of our financial system and have a properregulation at the same time. The third, in the target of regulatory value, we shouldfocus on the coordination and the interaction of security, efficiency, and fair, andusing fair value to adjust security and efficiency value, so as to make these valuesbalanced. The last point, we should gradually expand the principles-based regulation,under the premise of adhering to the rules-based regulation. Regulators have toproperly adjusted their supervision thoughts and improve the flexibility ofnon-financial-institution lenders’ business, enhance their competitiveness andinnovation power in the financial market.In the reformation of the institutional rules, the author proposes: firstly, we needto elevate the level of the legal rules and regulatory basis. We can formulate“ordinance for the administration of pawning” and “ordinance for the administrationof small-sum loan company” in legislative model. Secondly, the CBRC shouldperform the regulatory functions to non-financial-institution lenders, adjusting theregulatory structure, identify the regulatory principles, and as while enhanceself-regulaion by industry associations. Thirdly, market access, interest rate controls,and the financing system which are the three core rules for non-financial-institutionlenders should be reformed. The provincial Banking Regulatory Bureau isresponsible for the administrative approval of market access. They must reduce theregistered capital restricts, cancel the quotas quantities and eliminate otherunnecessary intervention in financial market. The author suggests to raise interestrate cap based on cap-control of it in order to reserve space for interest ratemarketization, while adjust existing financial rules and use a variety of ways tobroaden the financial channels for non-financial-institution lenders. The last, it isnecessary to build an incentive direction for non-financial-institution leders whohave higher development requirements. Village banks, financial-lending companies,community banks are all suitable to be ways of that non-financial-institution lenders choosed. The author primarily described the features of the community bank becausethere are a lot of similarities between non-financial-institution lenders andcommunity banks. In the end he brings forward that community banks should beestablished based on non-financial-institution lenders, and it is possible that makingnon-financial-institution lenders become the “incubator” in the process of buildingcommunity bank system in china.