China Banking Regulatory Commission, Guidelines for the Administration of Commercial Bank Collateral

For the purposes of these Guidelines, the term “collateral” means the property or rights that a debtor or third party mortgages or pledges to a commercial bank for the purpose of securing the realization of the relevant claims of the commercial bank in order to mitigate credit risks (Article 3).

Main contents: When a commercial bank uses collateral to mitigate credit risks, the precondition thereto shall be a comprehensive assessment of the debtor's solvency (Article 5).

A commercial bank shall, at minimum, classify collateral into categories such as financial pledge, real property, accounts receivable and miscellaneous collateral, and, on this basis, further divide the same into sub-categories. Additionally, it shall, in light of its business practice and risk control level, formulate a list of acceptable collateral and update the same at least once per year (Article 16).

In principle, with respect to collateral that has an active trading market and clear trading prices, the value thereof shall be determined with reference to the market value. Where another method is used for valuation, the appraised value may not exceed the then reasonable market value (Article 17).

A commercial bank shall prudently determine the ceiling on the mortgage/pledge rate for the various categories of collateral and adjust the same in light of the economic cycle, risk position and the market environment in a timely manner. It shall establish a dynamic monitoring mechanism, track collateral-related policies and changes in the industry and regional environment, analyze their effect on the value of collateral, issue advance warning information in a timely manner and, when necessary, take appropriate measures. It shall strengthen collateral concentration management and take necessary measures so as to guard against the risk arising from a too high proportion of a single collateral or single category of collateral. It shall, based on the level of significance of the collateral and the risk position, regularly conduct stress tests of the collateral, in principle at least once per year, and take countermeasures based on the outcome of such tests (Article 20).

Related legislation: PRC Security Law and PRC Property Law