(By Albert Chen) The capital shortage is inevitable during the company operation, and many operators could be head aching with the financing. Due to the strict demands and procedures for the credit approval in the banks, the company may suffer from the refusal of loan application or delay in lending. At that time, the non-bank loan could play another main role in the company financing. Then what risks may come to foreign invested companies as they enrolled in the non-bank loan when running business in China? Please check today’s post for the answer.

I. What is the non-bank loan?

The “non-bank loan” refers to the lending practices different from the normal financial loan within a state. By Article 21 of the Lending General Provision issued by China People’s Bank:

“Lenders must be approved by the People’s Bank of China to engage in lending business, hold a Financial Institution Legal Person License or a Financial Institution Business License issued by the People’s Bank of China, and be approved and registered by the administrative departments for the administration of industry and commerce.”

That means all the loans participated by the subjects not approved the above licenses are included in the scope of non-bank loan.

Currently, there are two main lending ways of non bank loan in practices:

1. The loan happened between the non financial companies (the “Company”) and individuals (either specific or unspecific);

2. The loan happened between Companies.

II. China’s laws regulating the non-bank loan

Then what attitude is holding by China laws towards the above non-bank loan?

1. The loan between the Company and the individual

The loan between the Company and the individual is mainly regulated by the General Principle of Civil Law, the Contract Law and other civil laws. And yet the law has set no prohibition on it, but that does not mean the loan between the Company and the individual could be carried out without any limitation.

First, regarding the lending by the Company, the law generally makes no interference to those involve few people, but once the borrower appears to be the unspecific subjects or the Company has established a separate credit department or institution with no administrative authorization, the lender may be fined, or it may even constitute the “Crime of Setting Up Financial Institution with No Authorization” as stipulated in Article 174 of the Criminal Law, and thereby the head of the Company would be punished the criminal penalty up to 10 years imprisonment.

Second, for the deposit absorbing by the Company from the unspecific public, it is also facing the liability of the Civil Law, Criminal Law and Administrative Law. And the head of it could be judged the “Crime of Illegal Absorbing Public Deposit” and the “Crime of Funding Fraudulence”, which criminal penalty may as high as a lifetime imprisonment or even a death penalty.

2. The loan between Companies

Not like the loan between the individual and the Company, China laws ban the loan happened between Companies completely.

According to the interpretation on law issued by the Supreme People’s Court, the loan contracts signed by Companies shall be invalid for they are violating the state financial regulations. When the borrower delays in the repaying of the borrowed capital after the expiration of the contract and the parties thereby file a lawsuit in the court, the court shall judge to demand the capital refund by the borrower, and also confiscate the interests. When no interest rate has been agreed by the parties, the interest shall be calculated as per the loan interest rate implemented by the bank in the same period and thereafter be confiscated.

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