Name: Circular on Further Regulating the Transfer of Credit Assets by Banking Financial Institutions (《关于进一步规范银行业金融机构信贷资产转让业务的通知》) (the "Circular")
Issuing authority: China Banking Regulatory Commission (the "CBRC")
Issuing Date: 3 December 2010
Subject: Credit assets transfer
Following the promulgation of a series of rules by the CBRC on transfer of credit assets since 2009, the CBRC has issued the Circular to further regulate credit assets transfer activities by PRC banking financial institutions (including onshore branches of foreign banks which are subject to CBRC supervision). The Circular not only reinforces the “true transfer” requirement contained in the 2009 Rules, but also further sets out detailed requirements that banking financial institutions must comply with in transferring credit assets. The Circular does not apply to non-performing credits.
Highlights
- True transfer – The Circular prohibits any express or effect of a buy-back of the credit transferred.
- Entire transfer – The Circular requires that a transferring bank transfer the entire outstanding principal and interest under the underlying credit agreement to a third party. This restricts a bank’s ability to transfer only a part of its credit, which is common in the market. It is not clear whether this could prohibit partial transfer to affiliates or other branches of the transferring bank or sub-participation, as a means of managing a bank’s portfolio of credits.
- Clean transfer – For the purpose of ensuring a true and entire transfer of assets and risks associated with the credit assets to be transferred, the Circular sets out specific requirements and procedures for the transfer. The transferee and the borrower are required to sign an agreement to confirm their respective rights and obligations after the transfer. In addition, unless otherwise agreed in the underlying credit agreement, a transferring bank must obtain the relevant borrower’s consent for the transfer of credits. This requirement appears to apply to both the assignment of rights and transfer of obligations by a transferring bank whereas the PRC Contract Law only requires a notification to the borrower in the case of an assignment of rights.
- The Circular also provides that where the credit is guaranteed or secured, the guarantor’s consent will be required and the security may also need to be transferred and/or registered for the benefit of the guarantee or security (as the case may be) to be transferred with the credit. The Circular is not clear on the extent to which the relevant parties may vary this consent requirement (e.g. the borrower and guarantor to grant consent to any transfer upfront in the credit agreement), and whether a transfer will in any event require the borrower’s consent to sign a new agreement notwithstanding any such consent in the credit agreement.
- Transfer of syndicated loans - In the case of a transfer of a syndicated loan, the participating banks (other than the transferring bank) have a right of first refusal to such transfer (presumably on the same terms, but this is not clear from the Circular). The transferring bank may transfer to a third party only where (a) the other participating banks do not exercise the right of first refusal; (b) the other participating banks have no objection to the proposed transfer; and (c) the transferee is a commercial bank. This materially reduces a bank’s ability to transfer their credits, particularly in relation to the terms of the transfer to another bank and the potential transferees (for example, even where the loan agreement allows transfer to non-banks).
- Purchase of credit assets with wealth management funds – Banks are expressly prohibited from directly purchasing credit assets by using the funds raised through their wealth management schemes. However, it is unclear what constitutes a “direct” purchase and whether a bank is allowed to use its wealth management proceeds to purchase credit assets from another bank through a trust company.
- Filing requirement – Both transferors and transferees are required to make filings with the CBRC on a quarterly basis in relation to their credit assets transfer activities.
If you would like to discuss anything regarding this Alert please contact Fang Jian (Shanghai), Nicola Mayo (Shanghai), Simon Poh (Shanghai), or Betty Yap (Hong Kong).
