What is an 'Entrusted Loan'

An entrusted loan is one 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 risks.

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 income by allowing the agent bank to loan the funds out. The companies retain the right to decide whom the agent bank lends the funds to. The People’s Bank of China, China’s central bank, has allowed entrusted loans since 2001.

The introduction of entrusted loans allows companies operating in China to improve their liquidity. However, entrusted loans are not as transparent as loans made in developed countries. Entrusted loans are not included in the balance sheets of the agent banks since they do not assume any credit risk. The exclusion of these loans can hide the risks faced by the agent bank if lenders are unable to pay. Lack of transparency also makes it more difficult to judge whether the economy is overheated or over-leveraged and if the quality of companies obtaining credit is declining. 

China Updates Entrusted Loan Regulations

As of early January 2018, though, China was taking steps to clamp down on leverage in the financial system. According to an article from Bloomberg, China is "ordering banks to make sure they aren't exposed to risks from their entrusted loan business." New regulations posted on the China Banking Regulatory Commission (C.B.R.C.) website, state that banks can only act as intermediaries in arranging entrusted loans. Banks must not provide guarantees or get involved in decision-making. Additionally, entrusted loans cannot be used for investments in bonds, derivatives, asset management or equities. Banks acting as intermediaries are not permitted to put their own money, or funds they manage into entrusted loans. The C.B.R.C. cited "certain potential risk hazards," from rapid growth and a lack of regulation, as the cause for tightened regulation.

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