On July 22, 2009, the Chinese Banking Regulatory Commission (CBRC) promulgated the Administrative Measures on Pilot Consumer Finance Companies (the “Pilot CFC Measures”) in order to promote domestic consumption and establish a multi-layer financial service system in China. It is reported that one Consumer Finance Company (CFC) will be approved by the China Banking Regulatory Commission (CBRC) to be established in each of four major cities (Beijing, Tianjin, Shanghai and Chengdu).
Pursuant to the Pilot CFC Measures, CFCs are defined as non-banking financial institutions incorporated within the territory of China upon the approval of the CBRC, providing PRC domestic residents with loans for consumption purposes and not engaging in deposit taking business. The minimum registered capital required for a CFC is RMB 300 million or equivalent freely convertible currencies, and the full amount should be paid up in a lump sum. CFCs are not allowed to conduct business outside the respective administrative regions in which CFCs are incorporated. CFCs may establish branches upon approval by the CBRC. The business scope of CFCs primarily includes individual durables consumption loans and individual general consumption loans, but excludes real estate loans and motor loans.
Both domestic and foreign financial institutions and other contributors recognized by the CBRC are allowed to invest in the CFCs. The major investor of a CFC (i.e., the investor who contributes 50 percent or more of the registered capital) must meet a set of stringent requirements as follow:
- It should have at least five years of experience in the consumer finance sector;
- Its total assets at the end of the most recent fiscal year should be no less than RMB 60 billion or equivalent foreign currency;
- It should be in a sound financial situation and be profitable for the most recent two fiscal years;
- It should have a good reputation and no record of material violation of laws or regulations during the past two years;
- It should have lawful funds to invest in the CFC and should not invest with loans or funds entrusted by a third party;
- It should undertake not to transfer the equity interest in the CFC within three years upon its establishment unless otherwise required by the CBRC;
- It should have a sound corporate governance, internal control and risk management mechanisms; and
- In the case of an offshore financial institution, such offshore financial institution has established either a representative office in China for at least two years or a branch in China. In addition, the financial regulatory authority of its home jurisdiction has established a good cooperative relationship with the CBRC.
The Pilot CFC Measures also specify that the CFCs must meet the following supervision requirements:
- The capital adequacy ratio should not be lower than 10 percent;
- The money borrowed by it through inter-bank market should not exceed 100 percent of its total capital;
- The asset loss provision adequacy ratio should not be lower than 100 percent; and
- The balance of investments made by a CFC should not exceed 20 percent of its total capital.