Tentative Measures for the Administration of Loans for Fixed Assets

Order of the CBRC [2009] No.2

(Promulgated by the China Banking Regulatory Commission on July 23 2009 and effective three months from the date of promulgation.)

Part One: General provisions

Article 1: These Measures have been formulated pursuant to laws and regulations such as the PRC Banking Regulation Law and the PRC Commercial Banking Law in order to regulate the loan business for fixed assets of banking financial institutions, strengthen the administration of the prudent operation of loans for fixed assets and promote the healthy development of the loan business for fixed assets.

Article 2: Banking financial institutions whose establishment in the People's Republic of China has been approved by the State Council's banking regulatory authority and that engage in the loan business for fixed assets (Lenders) shall comply with these Measures.

Article 3: For the purposes of these Measures, the term “loan for a fixed asset” means a renminbi or foreign currency loan extended by a Lender to an enterprise (public institution) with legal personality or another organisation that the state has specified may act as a borrower and that is to be used by the borrower to invest in a fixed asset.

Article 4: A Lender that engages in the loan business for fixed assets shall abide by the principles of lawfulness, compliance, prudent operations, equality, free will, fairness and good faith.

Article 5: A Lender shall enhance its internal control mechanisms, institute management of the entire loan procedure, fully apprise itself of its customers and their projects, establish a risk management system for loans for fixed assets and an effective mechanism for checks and balances among positions, assign the responsibilities for loan management at each stage to specific departments and positions and establish a mechanism for the assessment and accountability of positions.

Article 6: A Lender shall incorporate loans for fixed assets in the management of its credit lines to borrowers and the groups to which such borrowers belong and establish a risk limit management system for loans for fixed assets based on parameters such as geographical area, sector and loan type.

Article 7: A Lender shall agree upon a clear and lawful loan purpose with the borrower, and inspect and monitor use of the loan as agreed so as to guard against diversion of the loan.

Article 8: Banking regulatory authorities shall oversee the loan business for fixed assets of Lenders in accordance with these Measures.

Part Two: Acceptance and investigation

Article 9: An application for a loan for a fixed asset accepted by a Lender shall satisfy the following conditions:

(1) registration of the borrower has been approved in accordance with the law by the administration for industry and commerce or competent authority;

(2) the borrower has a good credit position and does not have a record of major improper activities;

(3) if the borrower is a newly-established investment project with legal personality, its controlling shareholder shall have a good credit position and no record of major improper activities;

(4) if the state has, in respect of the proposed project, requirements as to the qualifications of the investing entity and business qualifications, such requirements are satisfied;

(5) the purpose of the loan and the source of the funds for repayment are clear and lawful;

(6) the project complies with relevant state industrial, land, environmental protection and other such policies and the lawful administration procedures for fixed asset investment projects have been carried out in accordance with provisions;

(7) relevant state provisions on the business capital system for investment projects are complied with; and

(8) other conditions set by the Lender.

Article 10: A Lender shall set forth requirements in respect of the method by which the borrower submits application materials and their specific contents and shall require the borrower to adhere to the principle of good faith and undertake that the materials it has provided are true, complete and valid.

Article 11: The Lender shall assign specific responsible departments and positions to carry out a due diligence investigation and write the results thereof up in the form of a report. The main subjects of the due diligence investigation shall include the following:

(1) the particulars of the borrower, the project promoter(s) and other such relevant related parties;

(2) the details of the loan project;

(3) the details of the security provided for the loan; and

(4) other subjects that need to be investigated.

The due diligence investigators shall ensure that the contents of the due diligence report are true, complete and valid.

Part Three: Risk assessment, and examination and approval

Article 12: The Lender shall assign specific responsible departments and positions to conduct a comprehensive risk assessment of a loan for a fixed asset and prepare a risk assessment report.

Article 13: A Lender shall establish a sound risk assessment system for loans for fixed assets, set quantitative or qualitative indicators and standards and carry out loan risk assessments from the aspects of the borrower, the project promoter(s), project compliance, project technology, financial feasibility, the project's product market, the project's financing plan, the reliability of the source of the funds for repayment, the security provided, insurance, etc.

Article 14: A Lender shall set its examination and approval procedures for loans for fixed assets and specify the authority for examining and approving such loans in keeping with the principles of separating the examination and extension of loans and of hierarchical examination and approval so as to ensure that examination and approval personnel independently examine and approve loans in accordance with their authority.

Part Four: Execution of contracts

Article 15: A Lender shall execute relevant contracts, such as a written loan contract and security contracts with the borrower and other relevant parties. The contracts shall specify in detail the rights and obligations of the parties and liability for breach of contract, and avoid failing to provide for important matters, providing therefor in an ambiguous manner or providing therefor in an invalid manner.

Article 16: The Lender shall specify with the borrower in the contract elements such as the specific amount and term of, interest rate on, purpose and payment of the loan, the guarantee for repayment and the manner of dealing with risks, and relevant details.

Article 17: The Lender shall specify with the borrower in the contract the conditions for drawing down the loan and terms relating to the use of the loan, such as that the payment of the loan funds is subject to the management and control of the Lender. The drawdown conditions shall include requirements such as business capital proportional to the loan having been paid in in full and the actual progress of the project matching the amount already invested.

Article 18: The Lender shall specify with the borrower in the contract that the relevant accounts of the borrower will be subject to monitoring and, when necessary, a dedicated loan disbursement account and repayment reserve account may be specified.

Article 19: The Lender shall require the borrower to give, in the contract, undertakings as to material provisions relating to the loan. Such undertakings shall include the following: that the loan project and its loan matters satisfy the requirements of laws and regulations; that it will provide to the Lender complete, true and valid materials in a timely manner; that it will co-operate with the Lender in its inspections relating to the loan; that it will notify the Lender of any material adverse event that could affect its solvency in a timely manner; and that it will seek the consent of the Lender before it carries out any material matters, such as a merger, division, equity transfer, investment in a third party and material increase in debt financing.

Article 20: The Lender shall specify with the borrower in the contract the liability for breach of contract that the borrower is required to bear and the measures the Lender is entitled to take in the event that the borrower uses the loan for a purpose other than that agreed upon, fails to withdraw the loan funds in the manner agreed upon, fails to comply with its undertakings, information that it gave in the loan application is false, it exceeds the financial indicator constraints agreed upon, etc.

Part Five: Disbursement and payment

Article 21: A Lender shall establish independent responsible departments or positions responsible for loan disbursement and payment review.

Article 22: Before disbursing the loan, the Lender shall confirm that the borrower has satisfied the drawdown conditions specified in the contract and shall manage and control payment of the loan funds by the method specified in the contract and ensure that the loan funds are used for the agreed upon purpose through monitoring.

Article 23: If the contract provides for a dedicated loan disbursement account, disbursement and payment of the loan shall be handled through such account.

Article 24: The Lender shall manage and control payment of the loan funds either by way of “Lender direct payment” or “borrower controlled payment”.

The term “Lender direct payment” means that the Lender, pursuant to the borrower's drawdown application and payment entrustment instrument, pays the loan funds to the borrower's transaction counterparties that satisfy the purpose specified in the contract.

The term “borrower controlled payment” means that the borrower, after the Lender disburses the loan funds into its account pursuant to its drawdown application, itself pays the same to its transaction counterparties that satisfy the purpose specified in the contract.

Article 25: The Lender direct payment method shall be used for loan fund payments of single amounts exceeding 5% of the total investment in the project or exceeding Rmb5 million.

Article 26: If Lender direct payment is to be used, the Lender shall, before disbursing the loan funds, review the borrower's relevant transaction documentation to determine whether the conditions specified in the contract are satisfied. Once it has completed its review and given its approval, the Lender shall pay the loan funds to the borrower's transaction counterparties through the borrower's account and shall duly keep a record of its determination of relevant details.

Article 27: If borrower controlled payment is to be used, the Lender shall require the borrower to regularly provide summary reports on the payment of the loan funds and shall verify whether payment of the loan complies with the agreed upon purpose by way of account analysis, document examination, onsite investigation, etc.

Article 28: In the course of the disbursement and payment of a loan for a fixed asset, the Lender shall confirm that the business capital of the project proportional to the loan that it intends to disburse has been paid in in full and that it is used in conjunction with the loan.

Article 29: If, during the course of loan disbursement and payment, any of the circumstances set forth below come to apply to the borrower, the Lender shall consult with the borrower on supplementary loan disbursement and payment conditions or, pursuant to the contract, suspend disbursement and payment of the loan funds:

(1) its credit position weakens;

(2) it pays the loan funds in a manner contrary to that specified in the contract;

(3) the progress of the project falls behind that in the use of the funds; or

(4) in violation of the contract, it breaks up the project into smaller parts so as to avoid Lender direct payment.

Part Six: Post-loan management

Article 30: The Lender shall regularly inspect and analyse the borrower's and the project promoter's contract performance and credit position, the construction and operation of the project, macroeconomic changes and market fluctuations, changes in the security provided for the loan, etc., and establish a loan quality monitoring system and loan risk advance warning system.

If an adverse circumstance that could affect the security of the loan arises, the Lender shall conduct a new assessment of the loan risks and take pertinent measures to address the same.

Article 31: If the actual investment in a project exceeds the originally determined investment amount and the Lender, following a new risk assessment and examination and approval, decides to provide an additional loan, it shall require the project sponsor to concurrently increase its investment in an amount not lower than the proportion of the business capital of the project and increase the corresponding security.

Article 32: A Lender shall establish a post-loan dynamic monitoring and reappraisal system in respect of the value of mortgaged (pledged) things and the security provision capacity of security providers.

Article 33: A Lender shall dynamically monitor a fixed asset investment project's inward cash flow and the borrower's overall cash flow, in a timely manner, ascertain the reason for any irregularities and take appropriate measures.

Article 34: If a contract provides for a dedicated repayment reserve account, the Lender shall, as provided and as required, set requirements as to the proportion of the fixed asset investment project's or the borrower's inward cash flow that is to be deposited into such account and the average amount of funds to be kept in such account.

Article 35: If the borrower commits a breach of the contract, the Lender shall take effective measures in a timely manner and, when necessary, shall pursue the borrower's liability for breach of contract in accordance with the law.

Article 36: If a loan for a fixed asset becomes non-performing, the Lender shall manage it in a dedicated manner and formulate collection or efficient-use measures in a timely manner.

Where a borrower is genuinely unable to repay the principal and interest of a loan on schedule due to temporary business difficulties, the Lender may hold consultations with the borrower on restructuring the loan.

Article 37: With respect to a non-performing loan for a fixed asset that is genuinely unrecoverable, the Lender shall, after writing the same off in accordance with relevant provisions, continue to seek recourse against the debtor or marketise the same.

Part Seven: Legal liability

Article 38: If a Lender violates these Measures in operating its loan business for fixed assets, the banking regulatory authority shall order it to rectify the matter within a specified period of time. If any of the following circumstances apply to a Lender, the banking regulatory authority may take regulatory measures against it in accordance with Article 37 of the PRC Banking Regulation Law:

(1) there are defects in its loan business for fixed assets procedures;

(2) it fails to assign the responsibilities for loan management at each stage to specific departments and positions in accordance with these Measures;

(3) it fails to carry out loan investigations and risk assessments with due diligence;

(4) it fails to carry out ongoing and effective monitoring of the operations of borrowers and their projects in accordance with these Measures; or

(5) it fails to take effective measures in a timely manner in respect of breaches of contract by borrowers.

Article 39: If any of the following circumstances applies to a Lender, the banking regulatory authority may, in addition to taking regulatory measures in accordance with Article 38 hereof, impose penalties in accordance with Articles 46 and 48 of the PRC Banking Regulation Law:

(1) it accepts applications for loans for fixed assets that do not satisfy the conditions therefor and extends the loans;

(2) it colludes with borrowers in extending loans for fixed assets in violation of laws or regulations;

(3) it examines and approves loans ultra vires or in a disguised ultra vires manner or without following the specified procedure;

(4) it fails to execute loan agreements in accordance with these Measures;

(5) it disburses a loan before the business capital of the project proportional to the loan is paid in;

(6) it fails to effect management and control of loan fund payment in accordance with these Measures; or

(7) it commits another serious violation of these Measures.

Part Eight: Supplementary provisions

Article 40: Loans for fixed assets secured by a full amount guarantee pledge shall be handled with reference to these Measures.

Article 41: Lenders shall formulate rules for the management of loans for fixed assets and operating rules in accordance with these Measures.

Article 42: The China Banking Regulatory Commission shall be in charge of interpreting these Measures.

Article 43: These Measures shall be effective three months from the date of promulgation.