DENGZHOU (Henan) • The Chinese government is cracking down on online lenders that target students, often charging staggering rates of interest and employing violent debt collection methods.

Monthly compounded rates on loan contracts offered in 2015, which were reviewed by Reuters, were 1 to 2 per cent, implying an effective annual rate of 13 to 27 per cent. Penalties for late payments were at least 0.5 per cent daily, equivalent to 517 per cent annually.

The lenders provide credit on easy terms, capitalising on a materialism prevalent among students eager to get the latest iPhone or laptop. The ease of getting credit means students often take out new loans to pay back older ones or pay off interest, resulting in a cascade of unpaid debts and penalties.

The crackdown comes amid a surge in such loans and public outrage after stories of indebted students being driven to suicide became commonplace in the media and social networks in recent years.

Take, for instance, 21-year-old Zheng Dexing, who plunged to his death from a Qingdao hotel last year after he was hounded by debt collectors. A second-year university student, the native of central Henan province racked up debts of almost 590,000 yuan (S$123,000) after taking loans from a dozen online finance companies to pay for his gambling habit.

The government suspended online lenders in June from extending new loans to university students. It also ordered state banks to take up the credit slack, a major reversal as the lenders had withdrawn from the student market in 2009 amid fears over high default rates.

Many of the online lenders have complied with the suspension, but still appear to be targeting students.

The first online finance companies targeting university students emerged in 2013 and thrived in a regulatory vacuum. The industry had grown to more than 80 billion yuan by last year, state news agency Xinhua reported in March, citing unnamed research.

Applicants usually need to provide only their contact details, as well as those of family and friends, say those who took out loans. Some women have to submit nude images of themselves or perform lewd acts as collateral, with the threat that these images will be posted online if the debts are not paid.

Collection is also often enforced by violent thugs, said parents and students. "It was terrifying," said a first-year college student in Henan who owed 70,000 yuan. "Some boys were tied up and beaten."

The student loan problem is just a small part of China's massive financial system, but public anger has led the government to act. Mr Guo Shuqing, chairman of the China Banking Regulatory Commission, said in April that campus loan firms had a "very bad social influence". Two months later, the banking regulator announced the suspension of new loans by the firms.

Farmer Zheng Xianqiao, the father of the student who committed suicide, used his savings of 120,000 yuan to help pay back part of his son's loans. "We spent everything we had to repay his debt," he said. "In the end, he was still hounded to death by campus loans."

REUTERS