Provisional Measures for the Administration of Fixed Asset Loans

Issuing Body: China Banking Regulatory Commission

Issuing Date: July 23, 2009

Effective Date: October 23, 2009

Responding to widespread perception that fixed asset loans to Chinese enterprises—and in particular stimulus-related loans facilitated in response to the global financial—are not being used for their intended purposes, the China Banking Regulatory Commission (CBRC) has issued new and stricter guidelines requiring greater oversight by Chinese banks of fixed asset loans both in China and abroad. The CBRC issued the Provisional Measures for the Administration of Fixed Asset Loans (the Fixed Asset Loan Measures) on July 23, 2009. They take effect on October 23.

Since the worldwide financial crisis hit China in late 2008, the Chinese government has aggressively implemented an economic stimulus package to counter the adverse domestic effects of the crisis. As part of that stimulus, numerous bank loans have been extended to borrowers in large amounts, both in RMB and in foreign currencies. Many of those loans were intended—and approved—to fund the purchase of fixed assets; instead, a significant amount of that money has reportedly flowed into the stock market and real property. The CBRC drafted these new rules in response to the perception of abuse, having determined that strong action was needed. In some cases, for example, banks will not be allowed to give loan money to the borrower (which might then misuse it), but rather will be required to pay the seller of the fixed asset directly.

The Fixed Asset Loan Measures regulate the entire operating process related to fixed asset loans, requiring lenders to break down—and monitor—that process in different segments, including acceptance and pre-loan investigation, risk assessment and review, contract execution, extension and payment, as well as administration and oversight of loans after they have been granted. The rules also require lenders to delegate responsibility for each aspect of the loan process to specific departments and positions.

Lenders that violate the guidelines are subject to penalties.

Qualification for a Fixed Asset Loan

At their most basic, the Fixed Asset Loan Measures require lenders to perform a comprehensive assessment of the risks involved with each loan. In order to be accepted by the lender, a fixed asset loan application must satisfy the following requirements:

• The borrower has been duly approved by and/or registered with the State Administration for Industry and Commerce or another competent authority.
• The borrower has maintained a good credit record, with no material record of non-compliance.
• If the borrower is a newly established entity, its controlling shareholder must have a good credit record, with no material record of non-compliance.
• Specific requirements, such as confirming the business entity is qualified to operate the proposed investment project, are met.
• Both the purpose of the loan and the source of repayment are legitimate.
• The fixed asset investment project complies with relevant policies of industry, land use, environmental protection and administrative procedures.
• Capital rules for investment projects are followed.
• Other requirements imposed by the lender.

Measures to Prevent Abuse of Loan Proceeds

To avoid the abuse of loan proceeds, the Fixed Asset Loan Measures require the lender to reach agreement with the borrower before extending the loan regarding the definite and legitimate use of loan proceeds, conditions under which the loan is being made, payment methods, supervision, default liabilities and other aspects of the loan and repayment process.

The Fixed Asset Loan Measures provide for two loan disbursement methods, in some cases requiring that the loan money be paid directly to the party with whom the borrower has a contract to purchase the fixed asset(s). To guarantee that loans are used for the agreed-upon investment project, the measures require that the payments are made directly to the seller of the fixed asset or other counterparty to the borrower's contract if: 1) the amount of any single payment exceeds 5 percent of the total amount of the capital investment or 2) an individual payment exceeds RMB 5 million.

The Fixed Asset Loan Measures further require lenders to monitor the condition of the borrower after the loan has been made. If any of the following situations occur, the lender should negotiate with the borrower to supplement or amend the loan conditions, or cease extension of and additional payments according to the contract:

• Degrading of the borrower's credit standing
• Failure to repay the loan as contracted
• Delay in progress of the project compared with the planned use of loan proceeds
• The borrower has taken evasive action to avoid payment by the lender directly to the seller or other counterparty, in violation of the loan contract

Administration of the Loan After Extension

After extending the loan, lenders are required to examine and periodically analyze the borrower's financial status and progress of the investment project. This monitoring includes assessment of the borrower's performance statement, credit status and project operation statements, as well as broader changes in the economy, market fluctuations and changes in security.

The lender should also conduct dynamic monitoring of income and cash flow of the investment project and the borrower's overall cash flow. In case of any abnormal conditions, the lender should promptly investigate and discover the causes and take corresponding action.

While the Fixed Asset Loan Measures significantly strengthen the requirements for administration and supervision of fixed asset loans, neither the thresholds for access to fixed asset loans nor the basic conditions for extending loans have been changed.

Whether the Fixed Asset Loan Measures will be enforced strictly and effectively in practice remains uncertain.