On 10 April 2014, the China Banking Regulatory Commission (“CBRC”) published a report titled Interim Administrative Measures for Factoring Business of Commercial Banks (‘’Interim Measures Report’’), in an effort to regulate China’s fast-growing factoring industry. The regulation seeks to promote the healthy and orderly development of the sector. The main highlights include:
Clarification of the definition and categorization of factoring
Referring to international practice and industry standards, the Interim Measures Report defines factoring as a type of comprehensive financial service based on the transfer of account receivables by creditors to third parties, combining the collection, management, bad debt guarantee and financing of such account receivables.
Factoring business is divided into the following three categories: international factoring and domestic factoring; recourse factoring and nonrecourse factoring; and single-factor factoring and two-factor factoring. It is worth noting that a factoring business will be deemed to be involved in ‘international factoring’ if either the creditor or the debtor is located in a free trade zone.
Strengthening the management of factoring financing services
Aimed at targeting a number of concerns that have emerged during the development of factoring financing, the Interim Measures Report outlines certain standards that factoring businesses should meet. These concern, among other things, product-offerings, entry standards for customers and cooperative institutes, business inspection requirements, due diligence investigations, the ratio and term of financing and information disclosure.
Improving risk management in the factoring sector
Owing to the inherent risk associated with factoring, commercial banks are required to develop detailed factoring business management measures and operating procedures to effectively prevent and control risks. The Interim Measures Report requires, for example, that a commercial bank carry out factoring services directly, and not outsource to third-party agencies. This may in turn impact on the credit insurance industry.
Scope of application
All policy banks, branches of foreign banks, rural cooperative banks, credit cooperatives, finance companies and other banking financial institutions are bound by the Report and the provisions set out therein.