AFP - China may legalise its thriving unofficial sector of “underground banks” in an attempt to help companies which have seen credit dry up recently, state media reported Monday.

Under the regulation drafted by the central bank, companies and individuals will be allowed to extend loans if they do not have bad credit or criminal records, the Beijing Times reported.

But they are banned from accepting deposits, and their lending rate should be kept within four times the government-set benchmark interest rate, it added.

“China’s credit market is monopolised by banks and the introduction of the regulation will break the monopoly by enabling qualified lenders to register and lend,” said Liu Ping, an official with the central bank’s research bureau.

“It can help resolve the problem of hard access to loans suffered by small and medium-sized enterprises,” she said, according to the newspaper.

Private lending will serve mainly smaller companies and farmers who can use their property as collateral, according to the draft regulation, which has been submitted to the Cabinet for review. Unofficial lending in China covers everything from loans among relatives to mafia-style operations, where failing to pay back one’s debt can mean death.

It has been a crucial link in providing finance for private enterprises that might often lack the connections to obtain loans from state-owned banks.

The central bank found in a survey that pawnbroking houses and “underground banks” have been thriving to an unprecedented extent in coastal regions, said the Beijing Times.

Lending rates in some areas reached as high as 300 percent, with the average standing at between 12 and 15 percent, it added.

The current benchmarking one-year lending rate at commercial banks is 6.66 percent.