Revised regulations for securities houses that use stock as loan collateral went into effect on Friday, widening financing channels for fund-thirsty securities businesses. The revision removes some of the restrictions contained in the regulation adopted in 2000 and further clarifies terms and obligations.
The new regulations were jointly issued by the , the China Banking Regulatory Commission and the China Securities Regulatory Commission.
The revised version will enable more securities houses to acquire bank loans via the use of equity collateral. In the past, only those with comprehensive operational licenses and a record of profitability over the preceding year were allowed to apply.
Convertible bonds issued by listed companies are for the first time considered a type of security that can be used as collateral for loans. Previously, only A shares and securities investment funds could be used.
The maximum term for such loans has been increased from six months to a year.
The amendment provides banks and securities companies clearer procedures and standards for handling these loans.
Despite the lowering of the eligibility bar, securities companies must still qualify for such loans by satisfying requirements concerning asset liquidity, risk control and information disclosure. They must also have sufficient reserves to cover trading risks and be free of major irregularities during the preceding year.
Stocks that cannot be used as collateral include those of loss-making companies, those that have been highly volatile in the preceding six months and those with significant investment by securities houses.
China first allowed securities companies to use stock as bank loan collateral in 2000. However, only a few big houses were able to secure such loans, partly because of the high thresholds and complicated procedures. Banks were often reluctant to grant them since the legal terms were vague and ratings of many securities firms were weak.
By the end of 2003, only about 30 billion yuan (US$3.6 billion) in stock collateral loans had been granted to securities companies.
The major problem with the securities houses is an irrational business structure and poor management, said Yi Xianrong, a Chinese Academy of Social Sciences researcher. They should find new profit resources and build up credit, he said.
(China Daily November 5, 2004)
