Entrusted Loan

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.