The China Banking Regulatory Commission has issued new rules that tighten regulation of entrusted loans, a category of credit extension that is considered a mainstay segment of the Chinese shadow banking sector.
The new regulations mandate that commercial banks should not participate in the decision-making for entrusted loans or provide any form of guarantee, given their status as intermediary parties to transactions.
Entrusted loans are a thriving part of the Chinese shadow banking sector that involves commercial banks serving as intermediaries for borrowing between non-financial businesses.
While the entrusted loan sector has abetted the channeling of credit to the real economy, CBRC points to the existence of “certain hidden risks” due to the absence of unifying rules and the fact that much lending takes place beyond the purview of official regulation.
According to the new regulations entrusted parties should be responsible for independently choosing qualified borrowers, as well as bearing associated credit risk.
Regulators will step up their scrutiny of funding sources, with commercial banks now required to avoid entrusted loans that make use of borrowed capital such as bank credit or funds with special purposes, as well as loans without ascertainable sources of funding.
The regulations prohibit the use of entrusted loans for production, operation or investment in sectors where the government has banned lending, as well as investment in financial products such bonds, derivatives, futures or asset management products.
Commercial banks are also required by CBRC to strictly separate entrusted loan operations from their own businesses, in order to improve risk controls and corporate governance.
Following a concerned deleveraging campaign and a crackdown on shadow banking sector in 2017, Chinese regulators are expected to continue to place heavy pressure on the financial sector this year as part of efforts to forestall systemic risk.
The release of regulations on entrusted loans coincides with the unveiling of new rules that target malfeasance by shareholders in Chinese commercial banks.