Amid concerns that the easing of monetary policy by the Central Chinese government in early 2009 have caused monies to be channelled to speculation in shares and real estate instead of the real economy and of the increasing risk of asset bubbles and bad loans, China Banking Regulatory Commission ("CBRC") issued the Tentative Measures for the Administration of Fixed Asset Loans (the "Measures") on 23 July 2009. The Measures which came into effect on 23 October 2009 aim to provide stricter guidelines on the approval process and strengthen internal control management for lending on fixed assets.
"Fixed asset loans" under the Measures refers to loans granted by a lender to a legal entity in China to finance investment in fixed assets, either in RMB or foreign currency.
Qualifications of Borrower
According to Article 9, the lender shall carry out a comprehensive risk assessment and ensure that the borrower fulfills the following conditions before a fixed asset loan is granted :-
(a) The borrower is duly registered with the Administration of Industry and Commerce or other competent authorities;
(b) The borrower has a good credit record with no material adverse record of non-compliance;
(c) If the borrower is a new company incorporated for the purpose of a new project, the controlling shareholder(s) must have a good credit record with no material adverse record of non-compliance;
(d) The investor of the proposed project meets all the special qualifications and operational requirements stipulated by the State;
(e) The purpose and source of funds for repayment of the loan are legitimate;
(f) The operation of the project is in compliance with the relevant industrial, land, environmental protection and administrative procedures;
(g) The operation of the project is in compliance with the capital requirement of the State; and
(h) Any other requirements as may be required by the lender.
Due Diligence and Risk Evaluation
For the purpose of approving the fixed asset loan, Article 11 requires the lender to conduct a due diligence and make a written report, containing the following :-
- information of the borrower, the promoter and other related
parties of the investment project;
- information of the project which requires funding;
- the security provided under the loan; and
- other necessary information.
In addition, the Measures require the lender to make a comprehensive risk evaluation of the loan. Issues such as the technical and financial feasibility of the project, reliability of the source of repayment, security and insurance, shall all be included in the risk evaluation report.
Use of Proceeds
One of the key features of the Measures is to strengthen control on the use of loan proceeds through the following provisions :-
(i) Terms of the loan agreement
Articles 16 to 20 provide that the loan agreement shall incorporate terms on the definite and legitimate use of the loan, payment method, conditions precedent of drawdown, borrower's undertakings, lender's right to monitor the use of proceeds and default liabilities.
(ii) Drawdown and payment
Article 24 provides that the lender can disburse the loan proceeds by entrusted payment to the ultimate payee or payment to the borrower. Article 25 requires the lender to be entrusted to transfer the loan proceeds to the ultimate payee if the amount of a single drawdown exceeds 5% of the total investment of the project or RMB 5 million.
On the other hand, if the loan proceeds are administered directly by the borrower, the lender should require the borrower to report regularly on the use of such proceeds pursuant to Article 27. In addition, the lender shall verify whether the proceeds are applied to the proposed project by bank account analysis, record checking and on-site investigation.
(iii) Post lending management
Article 21 provides that the lender shall assign an independent department or officer for approval of drawdowns and supervising payment of loans.
The lender is also required to establish a procedure for post lending risk management by regularly reviewing the risk exposure of the loan and taking timely measures to address any adverse conditions.
Lenders who violate the Measures are subject to penalties.
Conclusion
Whilst the Measures significantly tighten the administration and oversight of fixed asset loans in China, neither the thresholds for access to such loans nor the basic conditions for extending the loans, have been changed. Therefore, the practical effect of the Measures remain to be seen.
If you have any questions about the above Measures or other issues on foreign direct investments, joint ventures, mergers and acquisitions in Mainland China, experienced lawyers in our China Business Department will be happy to assist you.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
