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. 

RELATED TERMS
  1. Direct Consolidation Loan

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

    The result of an agreement between a borrower and a lender to ...
  3. Excess Loans

    A loan made by a state chartered or national bank to an individual ...
  4. Character Loan

    A character loan is a type of unsecured loan that is made on ...
  5. Temporary Lender

    A mortgage lender that sells the loans it originates into the ...
  6. Leveraged Loan

    Loans extended to companies or individuals that already have ...
Related Articles
  1. Credit & Loans

    Unsecured Personal Loans: 8 Sneaky Traps

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

    Getting A Loan Without Your Parents

    Use the 5 "W"s to finance your dreams without banking on a second signature.
  3. Economics

    An Introduction to Government Loans

    Government loans further policymakers' efforts to create positive social outcomes by offering timely access to capital for qualified candidates.
  4. Credit & Loans

    Why It’s So Hard to Get Small Mortgage Loans

    Finding a lender to provide a mortgage loan for less than $50,000: It's a challenge faced by a surprising number of people, and one that's often tough to solve.
  5. Economics

    Understanding Term Loans

    A loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate.
  6. Retirement

    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.
  7. Credit & Loans

    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.
  8. Mutual Funds & ETFs

    Financial Institutions: Stretched Too Thin?

    Find out how to evaluate a firm's loan portfolio to determine its financial health.
  9. Credit & Loans

    When Are Personal Loans a Good Idea?

    You never want to borrow money for frivolous reasons, but these five circumstances might warrant it.
  10. Personal Finance

    The Banking System: Commercial Banking - How Banks Make Money

    ByStephen D. Simpson, CFA As mentioned before, banks basically make money by lending money at rates higher than the cost of the money they lend. More specifically, banks collect interest on ...
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 >>
  3. Why do banks write off bad debt?

    Learn more about the practice of banks writing off bad debts and removing them from their books, including a hypothetical ... Read Answer >>
  4. What are the differences between delinquency and default?

    Find out more about loan delinquency, loan default, and the difference between a loan borrower defaulting and being delinquent ... Read Answer >>
  5. What is the difference between a fixed annual percentage rate (APR) and a variable ...

    Fixed ARP and variable APR loans operate differently but serve the same purpose: to collect interest from a borrower so the ... Read Answer >>
  6. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ... Read Answer >>
Hot Definitions
  1. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  2. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  3. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  4. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  5. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  6. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
Trading Center