Regulation on the Supervision and Administration of Financing Guarantee Companies(Mainland China)

Yenchu Chen

Financing guarantee is a critical element of a financial inclusion regime. The financing guarantee industry plays a major role in developing finance inclusion and promoting capital financing, particularly in resolving financing difficulties encountered by micro-enterprises and agriculture, agricultural villages and farmers (the “Three Agricultural Elements”). In recent years, even as financial inclusion is developing at a relatively fast pace, there were also issues such as insufficient supervision and oversight, a lack of regulation and care in operation, and inadequate willingness and capability to serve micro-enterprises and the Three Agricultural Elements. The Regulation on the Supervision and Administration of Financing Guarantee Companies (the “Regulation”) thus helps in providing increased support from a policy perspective, along with better supervision and effective prevention of risks to promote the healthy development of the financing guarantee industry. The Regulation will go into effect on October 1, 2017.
The Chapter I General Provisions of the Regulation specifies that its purposes are to support the development of financial inclusion, promote capital financing and regulate the conduct of financing guarantee companies for risk avoidance. The government will establish a governmental financing guarantee system, develop financing guarantee companies that are supported by the government, establish cooperation mechanisms, expand the availability of financial guarantee services to micro-enterprises and the Three Agricultural Elements while maintaining lower rates and fees. The financial departments at all levels of people’s governments will provide financial support to financing guarantee companies that primarily serve micro-enterprises and the Three Agricultural Elements. Government-supported financing guarantee companies will improve in their capability to utilize big data and information technologies in providing the financing needs of micro-enterprises and the Three Agricultural Elements. Financing guarantee companies that are included in the financing guarantee and risk sharing scheme as set up by the government are required to reduce the financing guarantee rates for micro-enterprises and the Three Agricultural Elements pursuant to relevant requirements of the state.
The Regulation stipulates the thresholds for establishing financing guarantee companies and their affiliates across provinces, autonomous regions and municipalities under the direct jurisdiction of the State Council, as well as the market exit requirements. The operating rules for financing guarantee companies are also detailed, including the creation of an internal control system covering the strengthening of rules for all operations and risk management in accordance with the principle of reasonable care in conducting business. In addition, the remaining guarantee liability balance will be calculated based on the risk weighting stipulated by the state, and the balance shall not exceed a corresponding percentage. Relevant reserves shall be set aside pursuant to applicable requirements. Self-owned capital shall be used in accordance with the state’s safety and liquidity requirements for assets owned by financing guarantee companies; financing guarantee companies shall not absorb from deposits or engage in de facto absorption from deposits, operate their own lending business, or lend and invest on behalf of others.
The Regulation clarifies the supervisory and administrative system for financing guarantee companies, which shall be the responsibility of departments named by the people’s governments in provinces, autonomous regions, and municipalities under the direct jurisdiction of the State Council. These people’s governments shall also be responsible for establishing policy measures that promote the development of the local financing guarantee business; as well as handle the risks of financing guarantee companies and remind the supervisory and administrative agencies to thoroughly carry out their duties. The State Council will set up a financial guarantee services interdisciplinary joint meeting to draft the supervisory measures for overseeing financing guarantee companies. The Regulation thus sets out the main responsibilities of the supervisory authorities and the specific regulatory measures, as well as requires financial guarantee companies to comply with the regulatory requirements.