Guidelines for Microcredit Providers in China
1. Guiding Opinions of the China Banking Regulatory Commission and the People’s Bank of China on Trial Run of Microfinance Companies, May 2008
2. CBRC Provisional Rules Governing Village or Township Banks, January 2007
3. CBRC Provisional Rules Governing Lending Companies, January 2007
Note: This is not an official translation, but courtesy of Baker Botts, L.L.P.
Guiding Opinions of the China Banking Regulatory Commission and the People’s Bank of China on Trial Run of Microfinance Companies
Yin Jian Fa [2008] No. 23
PBoC/CBRC, May 4, 2008
To: All bureaus of the China Banking Regulatory Commission; the Shanghai head office, all branches, all business management departments, the central sub-branches in all provincial-capital (capital) cities and in all sub-provincial cities of the People’s Bank of China
To fully and actually implement the perspective of scientific development, to effectively allocate financial resources, to guide the flow of funds to rural villages and underdeveloped areas, to improve the financial services in rural areas, to facilitate the development of the agricultural industry, the farmers and the rural economy, and to support the construction of new socialist rural villages, the following guiding opinions are hereby put forward with respect to the matters of the trial run of microfinance companies:
I. Nature of a microfinance company
A microfinance company is a company with limited liability or a company limited by shares established with investment from natural persons, enterprise legal persons and other social organizations, which does not take deposits from the public and operates in the microfinance business.
A microfinance company is an enterprise legal person with independent legal-person properties, which enjoys the rights to legal-person properties and assumes civil liabilities for its debts with all of its properties. A shareholder of a microfinance company shall have, in accordance with law, the rights to, among others, be benefited from such company’s assets, participate in important decision-making and select the managers and be liable to such company up to the amount of its subscribed capital contribution or the shares it subscribes for.
A microfinance company shall enforce the financial guidelines and policies of the State, roll out its business within the scope prescribed by the laws and administrative rules and regulations, operate with autonomy, be responsible for its own profit and loss, implement self-regulation, and assume its own risks, and its legal operation activities shall be protected by law and free from interference from any unit or individual.
II. Establishment of a microfinance company
The name of a microfinance company shall be constituted in the order of administrative zoning, trade name, industry and form of organization, of which, administrative zoning means the name of the administrative region at county level and form of organization shall be a company with limited liability or a company limited by shares.
The shareholders of a microfinance company shall meet the requirement for statutory quorum. A company with limited liability shall be established with capital contributions from no more than fifty (50) shareholders; a company limited by shares shall have 2-200 promoters, more than half of whom shall be required to have a domicile in the People’s Republic of China.
The source of registered capital of a microfinance company shall be true and legal, all of which shall be paid-up monetary capital to be paid in full on an one-off basis by the capital contributors or the promoters. The registered capital of a company with limited liability shall not be less than RMB¥5,000,000 and the registered capital of a company limited by shares shall not be less than RMB¥10,000,000. The shares held by a single natural person, enterprise legal person or social organization and its connected parties shall not exceed 10% of the total amount of registered capital of a microfinance company.
When applying for the establishment of a microfinance company, a formal application shall be submitted to the authority-in-charge under the government at the provincial level, and subject to such approval, an application shall be submitted to the local administrative authority for industry and commerce for completing the formalities for registration and obtaining a business license. In addition, the relevant materials shall be submitted and delivered, within five (5) working days, to the local public security organ, the local agency of the China Banking Regulatory Commission, and the local branch or sub-branch of the People’s Bank of China.
A microfinance company shall have an articles of association and a management system that meet the requirements and the necessary business premises, organization, and working personnel with relevant expertise and practical experience.
Any natural person, enterprise legal person or social organization making capital contribution for the establishment a microfinance company and any natural person intending to serve as a director, supervisor or senior management personnel of a microfinance company shall have no criminal record nor bad-faith record.
A microfinance company shall complete the formalities for tax registration with the local tax authority and pay various taxes and levies in accordance with law.
III. Source of funds of a microfinance company
The main source of funds of a microfinance company shall be the capital funds paid by its shareholders, the funds donated, and the funds financed by not more than two (2) financial institutions in the banking industry.
To the extent prescribed by the laws and administrative rules and regulations, the outstanding financed funds of a microfinance company obtained from financial institutions in the banking industry shall not exceed 50% of its net capital amount. The interest rate and the term for such financed funds shall be determined autonomously through consultation between such microfinance company and the relevant financial institutions in the banking industry and such interest rate shall be determined using the “Shanghai inter-bank borrowing interest rate” for the same period as the benchmark rate plus basis points.
A microfinance company shall apply to and obtain from a branch or sub-branch of the People’s Bank of China in its place of registration a loans card. A financial institution in the banking industry providing financing to microfinance companies shall promptly submit and deliver the financing information to the branch or sub-branch of the People’s Bank of China and the local agency of the China Banking Regulatory Commission of the place where it is located and shall track and supervise the application of such financing by such microfinance companies.
IV. Application of funds by a microfinance company
A microfinance company shall, subject to upholding the principle of serving the development of the farmers, the agricultural industry and the rural economy, autonomously select the loan targets. A microfinance company shall, in extending loans, uphold the principle of “small amount and dispersion”, be encouraged to provide credit facilities to farming households and micro-enterprises, and focus its efforts on expanding the number of clients and its service coverage. The outstanding loans of the same borrower shall not exceed 5% of the net capital amount of a microfinance company. To the extent of such standard, the restriction on maximum loan facilities may be formulated by making reference to the economic condition and the per capita GDP level of the place where such microfinance company is located.
A microfinance company shall conduct its operations according to the market-oriented principle and relax the maximum loan interest rate, which, however, shall not exceed the maximum prescribed by the judicial administration authority, and the minimum rate shall be 0.9 times the benchmark loan interest rate published by the People’s Bank, the specific floating range of which shall be autonomously determined according to the market principles. The substance of a contract regarding, among others, the term of a loan and the loan repayment terms shall be determined in accordance with law through consultation between the lender and the borrower subject to the principles of fairness and own free will.
V. Supervision and administration of microfinance companies
Where a government at the provincial level is able to clearly specify an authority-in-charge (finance office or relevant organization) to be in charge of the supervision and administration of microfinance companies and is willing to assume the liabilities for the risk disposal of microfinance companies, such government may, within the county area of its own province (district or city), roll out the trial run for the establishment of microfinance companies.
A microfinance company shall establish a system of undertakings by the promoters and the shareholders of such company shall enter into a written undertaking with such microfinance company to undertake that they will self-consciously abide by the articles of association of such company, participate in its management, and assume the risks.
A microfinance company shall, in accordance with the requirements of the Company Law, establish a sound corporate governance structure, clearly specify the right-obligation relationship among its shareholders, directors, supervisors and managers, formulate sound and effective rules of proceedings, decision-making procedures and internal audit system, and improve the effectiveness of corporate governance. A microfinance company shall establish a sound loan management system, clearly specify the business flow chart and operation standards for pre-loan investigation, examination at the time of extending loans and post-loan inspection, and practically strengthen loan management. A microfinance company shall strengthen internal control, establish a sound enterprise financial accounting system in accordance with the relevant provisions of the State, and truthfully record and fully reflect its business activities and financial activities.
A microfinance company shall, in accordance with the relevant provisions, establish prudent, regulated assets classification system and provision system, accurately carry out the classification of assets, fully make provisions for doubtful debts, and ensure that the asset loss reserve adequacy ratio is always maintained at above 100% to fully cover the risks.
A microfinance company shall establish an information disclosure system to disclose as required to its shareholders, the authority-in-charge, the financial institutions in the banking industry providing its financing, and the relevant donation organizations the financial statements audited by an intermediary and the information about, among others, its annual business performance, financing position and important matters and shall make disclosure to the public when necessary.
A microfinance company shall be subject to public supervision and shall not conduct any illegal fund-raising in any form. Where any illegal fund-raising activity is conducted, the people’s government at the provincial level shall, in accordance with the relevant provisions of the State Council, be responsible for the disposal of such funds. Where the disposal of funds from cross-province illegal fund-raising activities requires the coordination of the inter-ministerial joint conference for the disposal of illegally raised funds, the people’s government at the provincial level may ask the inter-ministerial joint conference for the disposal of illegally raised funds to coordinate such disposal. Other acts violating the laws or the administrative rules and regulations of the State shall be punished by the local authority-in-charge in accordance with the relevant laws and administrative rules and regulations; where a criminal offense is constituted, criminal liabilities shall be investigated and established in accordance with law.
The People’s Bank of China shall track and monitor the interest rates and fund flow of microfinance companies and incorporate microfinance companies into the credit report system. A microfinance company shall regularly provide to the credit report system business information about, among others, the borrowers, loan amounts, loan security and loan repayments.
VI. Termination of a microfinance company
The termination of the legal-person status of a microfinance company includes two kinds of situation: dissolution and bankruptcy. A microfinance company may be dissolved in the event of any of the following: (1) a cause for dissolution set forth in its articles of association; (2) dissolution upon resolution of the general meeting of shareholders; (3) dissolution is required as a result of the amalgamation or division of such company; (4) its business license is suspended or it is ordered to close or is deregistered in accordance with law; or (5) a people’s court declares its dissolution in accordance with law. The dissolution of a microfinance company shall be subject to liquidation and cancellation conducted in accordance with the Company Law.
Where a microfinance company is declared bankrupt in accordance with law, bankruptcy liquidation shall be implemented in accordance with the law on enterprise bankruptcy.
Where a microfinance company operates in accordance with law and in compliance with the regulations and has no bad-faith record, such company may, subject to the free will of its shareholders, be converted into a rural bank in accordance with the standards of the Guidelines for Examination and Approval of the Establishment of Rural Banks and the Interim Provisions on Administration of Rural Banks.
VII. Miscellaneous
The local agencies of the China Banking Regulatory Commission and the branches and sub-branches of the People’s Bank of China shall closely cooperate with the local governments, roll out their work innovatively, and strengthen the policy propaganda on work with respect to microfinance companies. At the same time, they shall actively roll out the training work for microfinance and provide selectively relevant training to microfinance companies and their clients.
Any matter not specified in these Guiding Opinions shall be enforced in accordance with the laws and administrative rules and regulations, including, among others, the Company Law of the People’s Republic of China and the Contract Law of the People’s Republic of China.
The power of interpretation over these Guiding Opinions shall be vested with the China Banking Regulatory Commission and the People’s Bank of China.
All bureaus of the China Banking Regulatory Commission, and the Shanghai head office, all branches, all business management departments, the central sub-branches in all provincial-capital (capital) cities and in sub-provincial cities of the People’s Bank of China are requested to transmit these Guiding Opinions to the sub-bureaus of the China Banking Regulatory Commission and to the central sub-branches in prefectures and cities and in counties (cities) and the relevant units of the People’s Bank of China.
China Banking Regulatory Commission People’s Bank of China
Dated: May 4, 2008
Original article in Chinese: http://www.cbrc.gov.cn/chinese/home/jsp/docView.jsp?docID=2008050844C6FDE83536CF44FFF6E85E5BC32C00
Provisional Rules Governing Village or Township Banks
CBRC, January 29, 2007
(Condensed version, relevant articles selected)
Chapter I General Provisions
Article 2 The village or township banks hereunder refer to the banking financial institutions set up by domestic or foreign financial institutions, domestic non-financial legal entities, and/or domestic natural persons in rural areas with the approval of the China Banking Regulatory Commission (hereinafter referred to as the “CBRC”) in accordance with applicable laws and regulations, to provide financial services mainly to local farmers, agricultural production and rural economy.
Article 3 A village or township bank is an independent legal entity that enjoys the entire property of the entity that is formed by the investments of its shareholders. It shall fully enjoy civil rights and assume civil liabilities to the extent of all its assets. The shareholders of a village or township bank shall have the rights to enjoy the asset proceeds, make importance decisions, and choose managers in accordance with the law. They shall be liable for the bank’s debts to the extent of their respective capital contributions or shareholdings.
Article 5 Village or township banks shall not grant credit loans to their connections. The conditions for granting secured loans thereto shall not be more preferential than those for granting the same type of loans to other borrowers.
Village or township banks shall not grant loans to those other than local borrowers.
Chapter II Establishment
Article 7 The name of a village or township bank shall be composed of the administrative division, firm name, industry and corporate form in a sequential manner, among which the administrative division means the name or geographical name of the administrative division at the county level.
Article 8 A village or township bank shall meet the following requirements for establishment:
1) The articles of association shall satisfy applicable provisions;
2) The initiators or contributors shall meet applicable conditions and at least one of them shall be a banking institution;
3) The registered capital of a county based village or township bank shall be no less than RMB3 million and the that of a township based village or township bank shall be no less than RMB1 million;
4) The registered capital shall be a lump-sum cash capital paid by the initiators or contributors in full amount;
5) The board directors and senior management personnel shall be with appropriate qualifications;
6) The staff shall be with necessary professional knowledge and experience in work;
7) There are in place sound organizational structure and management system;
8) There are in place required business premises, safety precautions and other facilities relevant to the business operations;
9) Other prudent requirements as prescribed by the CBRC.
Article 16 Village or township banks can set up branches within the county region to meet the demands of rural areas for financial services or according to their own business strategy. There will be no restriction on the amount or percentage of operating capital when a village or township bank establishes a branch.
Article 17 The application for the establishment of a village or township bank branch shall go through two stages, first for the preparation for incorporation and second for the business commencement.
The village or township bank, which plans to set up a branch, shall provide to the CBRC local offices ex ante a preparation plan for a record.
The application for the business commencement of a branch shall be subject to acceptance, examination and approval by the CBRC local offices. The said offices shall make a decision on whether or not to approve it within two months from the date of the acceptance thereof.
Chapter III Ownership arrangement and qualification of shareholders
Article 21 To fund the establishment and take shares of a village or township bank, a domestic financial institution shall meet the following requirements:
1) A commercial bank, being the applicant for setting up a village or township bank, shall have a capital adequacy ratio of no less than 8 per cent both on a solo and consolidated basis and with main supervisory indicators meeting regulatory requirements; other financial institutions, being the applicant, shall have their main compliance indicators and supervisory indicators satisfy regulatory requirements;
2) having been in good financial standing and been profitable for two consecutive years prior to the application;
3) having true and legitimate sources of stakes;
4) having been in place good corporate governance and a sound and effective internal control system; and
5) other prudent requirements as specified by the CBRC.
Domestic financial institutions shall obtain the prior consent of the banking regulatory authority and other related government agencies before funding the establishment of a village or township bank or taking shares in a village or township bank.
Article 22 To fund the establishment or take shares in a village or township bank, a foreign financial institution shall meet the following requirements:
1) having a total asset, in principle, of no less than USD1 billion as of the end of previous year;
2) having sound financial strength and creditworthiness and been profitable for two consecutive accounting years prior to the application;
3) a banking institution shall have its capital adequacy ratio reach, at least 8 per cent, the average ratio of the local banks in the city where the proposed village or township bank is to be registered; the total capital of a non-banking financial institution shall be no less than 10 per cent of the risk-weighted assets;
4) having true and legitimate sources of stakes;
5) having in place good corporate governance and a sound and effective internal control system;
6) having in place a sound financial regulation and supervision system in its home country or region;
7) the application for funding or taking shares of a village or township bank shall have been complied with the laws, regulations and regulatory requirements of its home country or region;
8) having good economic situation in its home country or region; and
9) other prudent requirements as specified by the CBRC.
Article 23 To fund the establishment and take shares in a village or township bank, a domestic non-financial enterprise shall meet the following requirements:
1) having registered with the commercial and industrial administrative authority and having the status of legal person;
2) having good reputation, good faith records as well as good records of tax payment;
3) being in good financial standing and profitable in the year prior to the application;
4) net asset after year-end distribution reaching 10 per cent or more of the total assets (on the basis of consolidated accounting statements);
5) having legitimate sources of stakes, and borrowed funds or trusted funds are prohibited to invest as shares;
6) having been capable of operation management and been with strong capital strength; and
7) other requirements as specified by the CBRC.
An applicant enterprise that has completed corporate reform may count the operational results and age of the original enterprise as parts of the new enterprise.
Article 24 To fund the establishment and take shares in a village or township bank, a domestic natural person shall meet the following requirements:
1) having the capability to independently assume civil liabilities;
2) having good social prestige and good faith records;
3) having legitimate sources of stakes, and borrowed funds or trusted funds are prohibited to invest as shares; and
4) other prudent requirements as specified by the CBRC.
Article 25 The controlling shareholder or sole shareholder of a village or township bank must be a banking institution. The controlling shareholder who is a banking financial institution shall hold at least 20 per cent of the bank’s total equity. The individual natural persons and their related parties shall hold no more than 10 per cent of the bank’s total equity and the individual non-bank financial institutions or non-financial enterprises shall hold no more than 10 per cent of the bank’s total equity.
Any organization or individual who wants to hold more than 5 per cent of a village or township bank’s total equity shall obtain prior consent of the CBRC local offices.
Chapter IV Corporate Governance
Article 33 A village or township bank shall have one president and one to three vice presidents where necessary. Small-sized village or township banks may have the chairman of the board or executive director to serve as the president.
The board or supervisory department (or post) shall conduct an annual targeted auditing on the president’s performance and report to the board or shareholders’ meeting and meanwhile file a record with the CBRC local offices. Upon the end of the term, the president and vice president(s) shall be subject to the departure auditing.
Chapter V Operation and Management
Article 38 Village or township banks may engage in some or all of the following businesses with the approval of the CBRC local offices:
1) taking deposits from the general public;
2) granting short-term, medium-term and long-term loans;
3) handling domestic settlements;
4) handing the acceptance and discounting of negotiable instruments;
5) engaging in inter-bank lending;
6) engaging in bank card business;
7) acting as an agent for issuing, honoring and underwriting of government bonds;
8) acting as an agent for receipt and payment of money and for insurance companies; and
9) other businesses as approved by the banking regulatory authority.
A village or township bank can act as an agent for financial institutions including policy banks, commercial banks, insurance companies, and securities firms in accordance with applicable regulations and rules.
Where conditions permit, a village or township bank shall set up ATMs in rural areas and issue bank cards to farmers and rural economic organizations according to their credit standings.
In villages or towns with a vast land area but small population, village or township banks may deliver services in a mobile manner.
Article 39 After having made full amount of deposit reserves, a village or township bank can utilize all funds available to support local economic development. When making loans, priority should be given to rural households within the county region to meet the needs of agricultural production and rural economic development. When the actual funding needs for agricultural purpose are fully satisfied, the surplus funds can be used to invest in local industries, purchase agriculture-related bonds, or fund other financial institutions.
Article 40 A village or township bank shall have in place a credit authorization arrangement tailored to its own business development so as to reasonably set credit lines for different borrowers. Within the ceiling of the credit, the bank may make revolving loans with a one-off credit authorization.
Article 41 A village or township bank shall stick to the principle of making loans in small amounts and with wide range so as to enlarge the coverage of loans and avoid the excessive centralization. The outstanding balance of loans made to a same borrower by the village or township bank may not exceed 5 per cent of the bank’s net capital. The credit balance authorized to a business group customer may not exceed 10 per cent of the bank’s net capital.
Article 42 A village or township bank shall put in place a prudent and normative asset classification system and a capital replenishment and constraint mechanism in order to correctly classify the asset quality, make adequate provisions for non-performing assets, promptly write off bad debts, truthfully report operational results, and meanwhile ensure the capital adequacy ratio is no less than 8 per cent at any time together with its adequacy ratio of provisions for impaired assets being no less than 100 per cent.
Article 45 A village or township bank shall submit the accounting statements, statistic statements and other documents to the CBRC local offices and be responsible for the truthfulness, accuracy, and completeness of such statements and documents.
Chapter VI Supervision and Inspection
Article 51 The banking regulatory authority shall, where necessary, take the following regulatory measures according to village or township banks’ capital adequacy and asset quality:
1) The banking regulatory authority may reduce the frequency and scope of on-site inspection if a village or township bank’s capital adequacy ratio (CAR) is above 8 per cent and the ratio of non-performing loans (NPL) below 5 per cent;
2) It shall urge those banks with the CAR being above 4 per cent but below 8 per cent to develop a viable capital replenishment plan to improve the CAR within a specified time limit. In a meantime, the banking regulatory authority shall reinforce off-site surveillance and on-site inspection, and take necessary actions to rein in their asset growth rate, fixed assets acquisition, distribution of dividends and other income, establishment of branches, and commencement of new businesses;
3) It may instruct those banks, whose CAR drops to 4 per cent while NPL ratio exceeds 15 per cent, to change directors or senior executives, terminate part or all of business operations, or make reorganization within a specified time limit;
4) It shall take over the bank or cancel the registration or announce bankruptcy thereof if it fails to reorganize itself effectively and the CAR drops to 2 per cent or below.
For full articles, see: http://www.cbrc.gov.cn/chinese/home/jsp/docView.jsp?docID=20070518B45B01...
Provisional Rules Governing Lending Companies
Condensed version, relevant articles selected
CBRC, January 2007
“A lending company is a limited corporation with its capital wholly contributed by domestic commercial banks or rural cooperative banks.”
Article 2: The “lending companies” in these rules refer to the non-bank financial institutions incorporated in rural areas by domestic commercial banks or rural cooperative banks with the approval of the China Banking Regulatory Commission (hereinafter referred to as the “CBRC”) in accordance with applicable laws and regulations, to provide loan services specially to local farmers, agricultural production and rural economy.
Article 3: The investors of a lending company shall have the rights to enjoy the asset proceeds, make important decisions, and choose managers in accordance with the law.
Article 9: The investors of a lending company shall meet the following requirements:
1) The investors shall be domestic commercial banks or rural cooperative banks;
2) The asset volume shall be no less than RMB5 billion;
3) There are in place a good corporate governance and a sound and effective internal control system;
4) The main prudent supervisory indicators shall be in accordance with supervisory requirements;
5) Other prudent requirements as prescribed by the CBRC.
Article 20 Lending companies may engage in the following businesses with the approval of the CBRC local office:
1) Making loans;
2) Discounting papers;
3) Conducting the transfer of assets;
4) Providing settlement service for loans;
5) Other asset businesses as approved by the CBRC.
Lending companies are not permitted to take deposits from the general public.
Article 21 The operating capital of a lending company shall be paid-up capital and/or funds borrowed from investors.
Article 22 The business operations conducted by a lending company shall aim at serving the farmers, agriculture and rural areas, and the loans shall be mainly made to support farmers, agricultural production and rural economic development.
Article 23 A lending company shall make loans in small amount and in a diversified manner so as to enlarge the loan coverage and avoid the loan concentration. The outstanding balance of loans to a borrower may not exceed 10 per cent of the company’s net capital. The credit balance authorized to a business group customer may not exceed 15 per cent of the company’s net capital.
Article 28 A lending company shall truthfully record and reflect their business activities and financial status in an all-round manner and compile, on this basis, the annual financial and accounting reports, which shall be audited by qualified accounting firms. The auditing reports shall be submitted to the CBRC local office for records.
Article 29 A lending company shall submit the accounting reports, statistic statements and other documents to the CBRC local office and be responsible for the truthfulness, accuracy, and completeness of such statements and documents.
Article 33 The CBRC shall, where necessary, take the following regulatory measures according to lending companies’ capital adequacy ratio (CAR) and asset quality:
1) Reducing the frequency of examination if a lending company’s CAR is above 8 per cent and NPL ratio below 5 per cent;
2) Intensifying on-and-off-site supervision and urging the company to make capital replenishment within a specified time limit and improve asset quality if the company’ CAR falls below 8 per cent but above 4 per cent or its NPL ratio exceeds 5 per cent;
3) Taking such supervisory actions as ordering to change senior executives, terminating all business operations, or having the company make reorganization within a specified time limit if the company’s CAR drops below 4 per cent or NPL ratio exceeds 15 per cent;
4) Canceling the registration or ordering the investors to take over the company if it fails to make reorganization and its CAR tumbles below 2 per cent.