Entrusted Loan

AAA

DEFINITION of 'Entrusted Loan'

A loan organized by an agent bank between borrowers and lenders. In an entrusted loan the agent bank is considered the trustee and the company providing the funds is considered the trustor. The trustee is responsible for the collection of principal and any interest, for which it charges a handling fee, but does not undertake any of the loan risk.

BREAKING DOWN 'Entrusted Loan'

Entrusted loans are commonly found in China, which restricts direct borrowing and lending between commercial enterprises. The loans offer companies with idle funds the chance to earn interest by allowing the agent bank to loan the funds out, while still letting the companies choose whom the agent bank lends the funds to. The People’s Bank of China, China’s central bank, has allowed entrusted loans since 2001.

While the introduction of entrusted loans has allowed companies operating in China to improve their liquidity, their use is not as transparent as many loans made in developed countries. Entrusted loans are kept off bank balance sheets because agent banks do not assume any credit risk, which can hide the risks banks face if lenders are unable to pay. This lack of transparency also makes it more difficult to judge whether the economy is overheated or over-leveraged, or if the quality of companies obtaining credit is declining. 

RELATED TERMS
  1. Revolving Loan Facility

    A financial institution that allows the borrower to obtain a ...
  2. Recourse Loan

    A type of loan that allows a lender to seek financial damages ...
  3. Brazil, Russia, India, China And ...

    An acronym for the combined economies of Brazil, Russia, India, ...
  4. Tandem Loan

    Two loans taken out on one asset, which is usually a house; the ...
  5. Loan Lock

    The securing of a specified interest rate on a mortgage that ...
  6. Self-Liquidating Loan

    A type of short- or intermediate-term credit that is repaid with ...
Related Articles
  1. Investing Basics

    Investing In China

    Investment opportunity is huge in China. However, investors should consider the pitfalls, understand the risks and rewards, focus on shareholder-friendly companies and stick to investments they ...
  2. Investing Basics

    How Banks Set Interest Rates On Your Loans

    On the face of it, figuring out how a bank makes money is a pretty straightforward affair. A bank earns a spread on the money it lends out from the money it takes in as a deposit. The net interest ...
  3. Credit & Loans

    5 Tips For Getting Your Bank Loan Approved

    Find out how to present the perfect, complete package for your lender and increase your chances of gettinga loan approved.
  4. Credit & Loans

    Can't Get A Bank Loan? Turn To Your Neighbor

    Peer-to-peer lending can be an inexpensive way to gain access to credit when banks are restricting lending -- but you need to understand the entire deal first before jumping in.
  5. Personal Finance

    Introduction To The Chinese Banking System

    As China steps into a greater role in the global economic system, their banking system continues to evolve.
  6. Entrepreneurship

    Top 6 Factors That Drive Investment In China

    FDI in China surpassed $100 billion in 2010, certain key factors drive foreign direct investment.
  7. Economics

    Explaining the CAMELS Rating System

    Regulators use the CAMELS rating system to evaluate a bank’s level of risk and overall condition.
  8. Markets

    The 5 Biggest Chinese Natural Gas Companies

    Read about the top five Chinese natural gas companies as measured by gas production volume and learn a little more about their business operations.
  9. Markets

    The 5 Biggest Chinese Insurance Companies

    Read about the top Chinese insurance companies by market capitalization, and learn a little about their positions in the marketplace.
  10. Mutual Funds & ETFs

    ETF Analysis: PowerShares KBW Bank

    Consider an examination and analysis of the PowerShares KBW Bank Portfolio ETF, considered one of the primary financial sector ETFs.
RELATED FAQS
  1. What is the difference between a Debit Order and a Standard Order in a bank reconciliation?

    While both debit orders and standard orders represent recurring transactions that must be considered in bank reconciliations, ... Read Full Answer >>
  2. How can I cancel a bank draft that I have purchased?

    It is not commonly possible to cancel or stop payment on a bank draft since it, in effect, represents a transaction that ... Read Full Answer >>
  3. How does investment banking differ from commercial banking?

    Investment banking and commercial banking are two primary segments of the banking industry. Investment banks facilitate the ... Read Full Answer >>
  4. Who generally structures a syndicated loan?

    Typically, either an investment bank or a commercial bank structures a syndicated loan. A syndicated loan is provided by ... Read Full Answer >>
  5. What role does a correspondent bank play in an international transaction?

    A correspondent bank is most typically used in international buy, sell or money transfer transactions to facilitate foreign ... Read Full Answer >>
  6. What are the typical repayment terms for a syndicated loan?

    The typical repayment terms for a syndicated loan are periods of three to six years for short-term loans or seven to 10 years ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Bubble Theory

    A school of thought that believes that the prices of assets can temporarily rise far above their true values and that these ...
  2. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  3. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  4. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  5. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
  6. Dead Cat Bounce

    A temporary recovery from a prolonged decline or bear market, followed by the continuation of the downtrend. A dead cat bounce ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!