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. Standing Loan

    A type of loan where payments are made of interest only. Repayment ...
  2. Commercial Loan

    A debt-based funding arrangement that a business can set up with ...
  3. Direct Consolidation Loan

    A loan that combines two or more federal education loans into ...
  4. Renegotiated Loan

    The result of an agreement between a borrower and a lender to ...
  5. Unsecured Loan

    A loan that is issued and supported only by the borrower's creditworthiness, ...
  6. Term Loan

    A loan from a bank for a specific amount that has a specified ...
Related Articles
  1. Managing Wealth

    Unsecured Personal Loans: 8 Sneaky Traps

    If you are seeking a personal loan, be aware of these pitfalls before you proceed.
  2. Insights

    An Introduction to Government Loans

    Government loans further policymakers' efforts to create positive social outcomes by offering timely access to capital for qualified candidates.
  3. Small Business

    Lending Clubs: Better Than Banks?

    If you need to borrow money and your credit is making it tough, this new option may be just what you're looking for.
  4. Retirement

    Business Owners: A Guide To Qualified Retirement Plan Loans

    Thinking of adding a loan feature to your company's plan? Here's what you need to know.
  5. Personal Finance

    Personal Loans: To Lend Or Not To Lend?

    Attempting to help a loved one with a cash loan can put a strain on your relationship - and your bank account.
  6. Investing

    Commercial Real Estate Loans

    Obtaining a commercial real estate loan is quite different from borrowing for residential real estate. Here's what to expect and how to get what you need.
  7. Personal Finance

    All About Government Loans

    There are many reasons to seek a government loan rather than one from a private lender. Government loans typically have low interest rates and offer fixed or subsidized options, as well as deferred ...
  8. Personal Finance

    Different Needs, Different Loans

    Find out what options are available when it comes to borrowing money.
  9. Managing Wealth

    When Are Personal Loans a Good Idea?

    You never want to borrow money for frivolous reasons, but these five circumstances might warrant it.
RELATED FAQS
  1. Are secured personal loans better than unsecured loans?

    Read about the differences between secured loans and unsecured loans and how they are used. Learn about forms of collateral ... Read Answer >>
  2. What are the pros and cons of life insurance policy loans?

    Find out the pros and cons of borrowing against your life insurance policy to help you decide if this loan type is the right ... Read Answer >>
Hot Definitions
  1. Tax Liability

    The total amount of tax that an entity is legally obligated to pay to an authority as the result of the occurrence of a taxable ...
  2. Preferred Stock

    A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares ...
  3. Net Profit Margin

    Net Margin is the ratio of net profits to revenues for a company or business segment - typically expressed as a percentage ...
  4. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  5. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ability to pay short-term and long-term obligations, also known ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center