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UPDATE 1-China's top court slashes maximum legal private lending rate

(Adds details, quotes, background)

BEIJING, Aug 20 (Reuters) - China’s Supreme People’s Court on Thursday slashed the upper limit on private loan interest rates that will be protected by law, in a move to crack down on usurious loans and lower the borrowing costs of struggling small businesses.

The ceiling will be capped at four times that of China’s benchmark loan prime rate (LPR), He Xiaorong, a member of the Supreme Court’s judicial committee, told an online news briefing.

That would put the upper limit on one-year private loans at 15.4%, based on the current LPR rate.

China has been pushing financial institutions to offer cheaper loans and fee cuts to businesses in order to shore up an economy weakened by the COVID-19 pandemic.

“The coronavirus epidemic has left China’s smaller enterprises and individual businesses facing unprecedented challenges. Excessive financing cost is a key pressure,” he said. Previously, China’s courts would enforce the rights of borrowers or lenders in disputes over loans with interest rates up to 24%. Interest rates above 36% are considered illegal, according to a 2015 ruling, and those between 24% and 36% fall into a grey area.

Thursday’s amendment to the 2015 decision deals another blow to China’s non-bank lending market, composed mainly of online peer-to-peer lenders and micro-lenders, which has come under regulatory pressure in recent years as Beijing tries to curb financial risks.

While private lenders provide vital support to small businesses that have trouble obtaining bank loans, ultra-high interest rates have left many borrowers mired in debt and spawned often-aggressive collection practices.

“Some private lenders evaded financial supervision in recent years and conducted arbitrage in the name of financial innovation,” said He.

“In the long run, the amendment will help with the steady and healthy development of Internet finance and private lending sector,” He said.

Separately, the central bank said on Thursday that outstanding loans to small businesses stood at 13.7 trillion yuan ($1.98 trillion) by the end of July, up 27.5% from a year earlier.

Interest rates on those loans averaged 5.27% in July, 0.91 percentage points lower than a year ago. (Reporting by Cheng Leng and Tony Munroe; Editing by Alison Williams and Kim Coghill)

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