(Yicai) Oct. 10 -- A number of Chinese banks have cautioned that they will reclaim any loans that are found to be being used for purposes other than those declared, as the phenomenon of people taking out low-interest consumer loans to buy stocks re-emerges due to the stock markets’ recent meteoric rise.

Lenders are monitoring the flow of funds in borrowers' accounts, several bank insiders told Yicai. If it is found that consumer loans are not being used for the agreed purpose, the banks will immediately cut off the loans.

“Our bank has detected that some consumer loans are not being used for the purpose specified in the loan agreement and is currently investigating,” a representative of one joint-stock bank said.

Applying for a consumer loan is straightforward, requiring only basic personal information, several loan brokers contacted by Yicai said.

“I applied for low-interest loans from several banks before the week-long National Day holiday earlier this month and invested all of it in the stock market,” one investor in eastern Jiangsu province told Yicai.

Another young investor told Yicai that he invested CNY500,000 (USD70,779) in the stock market the first day after the break, using his available cash combined with a consumer loan from the bank.

Enquiries about loans have shot up recently, a loan broker told Yicai.

And some investors told Yicai that many loan brokers are taking advantage of the increased demand by offering to help them secure consumer loans to invest in the stock market without the banks finding out. The brokers are also using catch phrases such as "take advantage of the bull market to make a quick profit" to entice people to borrow.

The flow of funds from low-interest consumer loans into the stock market is essentially a form of leveraging, said Wang Pengbo, chief financial analyst at Botong Consulting. If the stocks fall, investors’ losses will be magnified due to having to pay back the loan. It could also lead to an increase in non-performing loans and a decline in asset quality for banks, if too many loans are being misappropriated.

China’s stock market experienced a sustained rally from Sept. 24, thanks to a big economic stimulus package rolled out by the Chinese government. External funds poured into the stock market and by Oct. 8 the Shanghai Composite Index had soared 33 percent. However, later that day, the major indices began to pull back noticeably.

Editors: Tang Shihua, Kim Taylor