Case Study On The Risks Of Entrusted Loans Of Commercial Banks And Its Prevention

Entrusted loan, as an intermediary business of commercial banks, has sixty years of development history, which is the special product of China's economic and social progress. During the period of planned economy, the entrusted loan is the government's fiscal loan and policy-related loan to serve the economic construction. After entering the market economy, the entrusted loan becomes the effective way of the social capital allocation. China's current laws and regulations forbid the borrowing between non-financial enterprises, thus entrusted loans gradually rose in which banks serve as a bridge between the non-financial enterprises. From 2002, participants were more diversified, form and content were evolving. Especially in recent years, the high non-performing loan ratio made banks more cautious to lend and banks are more engaged in the innovation of intermediary business. Thus the demand growth of both enterprises and banks promoted the rapid expansion of entrusted loans. Moreover, entrusted loan was chosen as an innovative way to achieve "the Belt and Road" strategy, which plays a positive role in promoting China's economic development.However, from 2000 to 2015, regulatory authorities have not issued explicit rules to regulate the management of entrusted loan, thus chaos of management gradually prevail. Entrusted loan defaults not only let entrust enterprises suffer economic losses, illegal operation of banks also does harm to the stability of the financial system, to the present stage of economic structure adjustment and national macroeconomic management, therefore entrusted loans should be regulated. Aware that also, China Banking Regulatory Commission issued "Regulation for Management of Commercial Bank Entrusted Loan (Draft)" in January 19,2015, for the first time specifying the scope of application of entrusted loans, business management, risk management and legal liability. The article holds that entrusted loan management requires not only financial regulatory specification, it's more pivotal for commercial banks to improve their management level and control risk proactively, in order to standardize the development of entrusted loans.The paper mainly studies the entrusted loan management of commercial banks, by the analysis of relevant cases, to explore approaches to consummate the management of entrusted loans of commercial banks, has certain theoretical and practical significance. The paper uses case study method to analyze risks of bank's entrusted loans, for the first time in the perspective of banks. The suggestions drew from the true cases can provide reference for the future improvement of the internal management system of commercial banks.This paper is based on the following structure:First of all, the paper introduces four relevant cases and analyzes the problems drew from the cases. In case 1, the bank ignored the review of fund inflows; in case 2 the compliance and legality before loan were left over; Case 3 reveals the bank engaged in fake entrusted loans to circumvent the regulation; poor implementation on collection and supervision after loan is reflected in case 4; poor internal control and review of fund outflows are also reflected in the cases.In the second part, the article analyzes the risks triggered by the problems mentioned above and explore the reasons. The flaws will ultimately bring about the expansion of bank credit risk, operational risk, legal risk and compliance risk. These problems exposed the lack and conflict of supervision, on the other hand, commercial banks also has their own motivation of violation. And their risk management measures are not in place.In the third part, the article analyzes the improvements of supervisory requirement and puts forward some suggestions for the improvement of risk management of entrusted loan in commercial banks, by responding to the two reasons drew in the last part. At the regulatory level, the Regulation relieves banks' responsibilities in the entrusted loans; set strict restrictions on the source and flow of funds; urge banks to strengthen internal control and risk management. Finally, this paper argues that to solve the problem of commercial banks entrusted loans, both of the supervisory and banking efforts are needed, but the commercial banks are in the dominant. Banks should pay enough attention to the pre loan review, and make risk exposure as an important basis for the acceptance of new businesses. As for the internal control, the paper believes that commercial banks should specify responsibilities of various departments, improve the credit risk management and internal accountability mechanisms. Commercial banks should also set up information management system for entrusted loans to lower information asymmetry risk. Take risks and costs as the ground for the fee, and protect the principal's fund security to foster the core competitiveness of the market competition. As for loans entrusted previously, banks should sort them out to nip in the bud. Internal statistical system should be established based on supervisory requirements and the supervisory system is also ought to be improved.In conclusion, the paper is based on the present status of entrust loans management and the regulatory requirements to preliminarily explore means of improving the risk management ability of commercial banks. The innovation of this paper is putting more emphasis on the initiative of commercial banks, and studying more related risks according to the new Regulation, to make commercial banks a better fund operator, and thus let the virtual economy promote the development of the real economy indeed.