Ordos city in North China's Inner Mongolia Autonomous Region released a regulation to legalize its rampant and unregulated private lending activities, indicating a nod from the government to a sector critical for the local economy, an official involved with the drafting of the regulation told the Global Times Thursday.

The private lenders are allowed to make loans with their own money, but are banned from taking deposits or any other form of illegal fundraising, according to the regulation published on the local government's official website late Wednesday.

The local government also encourages private lenders to make their activities more transparent and secure through a private lending information website and register at a commercially run registration center, the regulation said.

"It is a necessary move to legalize the private lending market, which has been in disorder and has seen some illegal activities," Huang Zheng, director of the financial law research institute at Beijing-based Central University of Finance and Economics, who took part in the drafting of the regulation, told the Global Times.

Previously, private lending was neither encouraged nor forbidden by the government, but now the government admits that "it plays an important role in the economic development," Huang noted.

"The new regulation will benefit our business," Zhao Haifeng, founder of Ordos Private Lending Website, an intermediary focused on matchmaking private lending deals, told the Global Times Thursday.

Illegal lending has caused many disputes surrounding contracts. The new regulation stipulates that the intended use of a loan must be specified in a contract.

As of August 2011, the private lending scale in Ordos reached 200 billion yuan ($31.4 billion) or more, exceeding the total amount of local bank deposits, according to a report released by Go High Investment Co in 2011.

Yang Yang, a 28-year-old office worker from Ordos, told the Global Times that her family used to lend to individuals and small companies in Ordos, but now can hardly recover their loans because of the local economic collapse and lack of contracts for many of the loans they have made.