(Yicai Global) Dec. 12 -- China has called on local governments to conduct checks on the legality of microloan firms as part of new rules to tighten control over the sector, with all unlicensed firms to close.

Local regulators need to conduct inspections of such firms falling under their jurisdiction to ensure that all have correct licenses to operate in the sector.

Inspections will focus on reviews and approvals of microloans, business licenses, equity management, asset securitization financing, interest rates and the scope of loans, states a government notice.

Those firms already holding licenses but not complying with regulations will undergo a review process. Local governments will classify lenders into three bands, namely, those that comply with rules, those that need to take corrective measures and those that should close. Regulators will shut down all unlicensed institutions.

Local authorities will check firms financing products with credit assets transfers or asset securitization to see if they comply with all relevant rules. Securitized products, quasi-securitized products or any other products that use cash loans, campus loans or down payment loans as underlying assets are forbidden.

Inspections will also include an assessment of overall interest rates of loans to determine if they comply with rules on private lending rates. The overall rate is the annualized proportion of all the lending costs, including interests and various types of fees payable by borrowers, as part of the principal loan.