CBRC Raises the Bar for Loan Collateral
The China Banking Regulatory Commission has stepped up collateral requirements for loans as part of ongoing efforts to combat risk in the Chinese financial sector.
On 8 May CBRC released a public announcement stating that in order to raise the security of loans it had issued the “Commercial Bank Collateral Management Guidelines,” clearly indicating that collateral management would now be included within the purview of its risk regulation system.
A CBRC official said that commercial banks currently suffer from problems including inadequate collateral management systems, a lack of standardised management processes and improper risk management procedures.
According to the official these inadequacies are impeding the ability of banks to fully make use of loan collateral as an effective risk buffer.
Beijing Business Today reports that some Chinese banks do not perform full assessments of the collateral items they receive, leading to its invalidation in some cases.
An example it cites is one company’s use of 55,000 square metres of industrial space as collateral when applying for a loan with a bank.
The bank issued the loan without conducting inspections of the nature of the industrial space, only to discover several years later after the company was liquidated that the local state land resources department had lawfully confiscated the land because of its nature and lease usage.
Other frequently occurring problems highlighted by regulators include inaccurate valuations of collateral, a lack of standard procedures for the execution of hypothecation contracts, as well as failure to properly supervise and control collateral once loans are issued.
In addition to mandating improvements to collateral management systems and the standardisation of handling procedures, CBRC’s new Guidelines also require that commercial banks divide collateral into different categories such as financial collator, real estate and accounts receivables, and on the basis of the banks own operations and risk control levels produce catalogues of acceptable collateral that are renewed at least once a year.
With respect to valuations of collateral, the Guidelines state that commercial banks should make reference should make reference to currents prices for those collateral items with an active market, as well as adopt rational price re-assessment frequencies for those collateral items with lower liquidity.