Bad Mortgage LoansBath mortgage loan
Bad loans, which turn into bad debts or loans that are no longer available, are a major concern for China's financial sector. So far, however, China's financial institutions have given the appearance that their credit control policies have been ineffective because the number of non-performing loans is disproportionately high. Prior to and during the performance of a credit contract, the institution should assess any possible exposure that may cause the debtor to fall into arrears with its credit covenant.
Among these risk factors are the borrowers' capacity to pay back the loans and the expiration and enforcement of the guarantee. On the basis of the risk assessment and risk assessment, the EIB decides whether to grant the credit and what terms and safeguards to set out in the credit contract.
In the case of loans without any guarantee - namely loans - where the debtor is a company, corporation or other unit, the institution prefers a debtor with a good rating or a good commercial relation with the institution. Occasionally, if the beneficiary considers it necessary, the beneficiary must provide proof of his or her qualification by submitting his or her annual statement to the beneficiary before the lending is made.
Knowing the borrower's situation is much simpler for the institution if the borrower is a unit, in particular a publicly traded group. However, for an uncollateralised personal loans, since China has not yet established a nation-wide personal lending system, there is no way to fully evaluate a person's personal creditworthiness by following historic notes.
Home-grown MFIs solve this issue by establishing their own customer lending lists as a foundation for assessing a person's creditworthiness. In general, the items under consideration include: degree, job, title, strength, living condition, deposit account with the institution where the request is made, previous records and even civil registration.
Certain banking institutions demand that the borrower's employers be recognised and have a solid relation with the institution, and that the institution be entitled to pay the borrower's salaries. A number of commercial banking institutions only grant uncollateralised loans to civil servants, teachers, doctors and banking personnel.
Shangai has recently established an integrative personal loan evaluation system. Shanghai Crédit Co. was opened on 3 April 2001. By providing a comprehensive review, the firm provides an impartial review of each individual's previous work. It provides a benchmark for banking and enables them to make rapid lending service delivery choices.
In the meantime, Shanghai Crédit Co has established cooperation relations with a number of local bankers in the town. Loans with a guarantee also expose the institution to the risk of bad loans, even if the guarantee is provided as collateral. Thus, for example, the debtor and the guarantee can plot to take out a mortgage unlawfully or violate the guarantee contract by declaring the guarantee to be unable to pay or to go bust in order to prevent payments.
Practically, in addition to checking the creditworthiness of the guarantee and the creditworthiness of the debtor, certain limitations are also imposed on the guarantee. As an example, some commercial institutions may allow home loan requests with a sponsor, but only if the sponsor is a high quality business organisation with a deposited account with the commercial institution.
In the case of loans with guarantees, such as mortgage loans and pledge loans, the ownership seized or pawned can be written off. An auto credit is an example. Under the rules, a debtor may pledge a vehicle acquired by him for an amount not exceeding 70 per cent of the purchase cost for a period not exceeding five years.
Therefore, a pledged vehicle can write off heavily during the credit period, undermining the bank's interest rates. In case the debtor is unable to pay back the credit on the due date, the encumbered vehicle must be resold. However, any significant decrease in the value of the vehicle will nullify the mortgage's object.
Given these pitfalls, some bankers, while exercising prudence in lending, can minimise the amount of credit if necessary. Or, the counterparty may be required by the counterparty to assume other guarantees, such as a surety. After deciding to grant a credit, the institution minimises its own exposure in the credit contract by incorporating as many kinds of regulatory action as possible.
Thus, for example, the banks usually require the borrowers to take out insurances when granting loans. This means that the banks always have their own demands. The mortgage credit policy mainly comprises the mortgage-backed general liability policy and the endowment policy for the debtor as an individuals. In the former case, the aim is to prevent the loss of value of the real estate due to deterioration or demolition, the latter being necessary if the debtor is not able to pay back the mortgage due to infringement, incapacity or invalidity.
Non-life insurances allow the beneficiary banks to assert their right to indemnification paid by the insurer. Under the PRC Warranty Act and the corresponding court interpretations, in the case of damage to the pledged assets, the mortgage creditor may have precedence to demand indemnification.
However, in practical terms, if the pledged object was mutilated before the full reimbursement of the credit, the beneficiary may request the courts to maintain the indemnity. With regard to a policy taken out by the Mortgagor, the bank may have precedence over indemnification. As a rule, the Shanghai mortgage credit institutions demand that the debtor take out fully all risk cover covering personal and non-personal liability insurances.
In principle, the credit arrangement stipulates that a debtor must from period to period make available to the institution a statement of its asset values, transactions or other financials. Often the arrangement states that the credit can be called immediately and the debtor must pay back the credit immediately - or the pledged object is sold for redemption - if certain occurrences occur.
Those occurrences include: the Mortgagor's repetitive default on repaying the Term Loan and any other loans due; persecution of the Mortgagor; transfer of the Mortgagor's property; or any other occurrence that the Mortgagor considers necessary to be incorporated into the Arrangement. It may also contain a requirement that would restrict the borrower's capacity to carry out certain operations.
It is, for example, usual for the banks to specify in a mortgage contract that the debtor may not rent the pledged object without the approval of the banks. In the event that the security right over real property creditor leases the pledged object without approval, this shall be considered a violation of the mortgage deed.
Nevertheless, in practise, the security right over real property creditor can at any time privately rent the pledged object to a third person in order to escape his duty of redemption. Mortgage creditors should then act in accordance with the Urban Area Real Estate Mortgage Administration Measures, which state that the proceeds from the letting of mortgage-backed real estate should first be used to pay back loans.
This will make it hard for the institution to keep an eye on each and every one of the borrowers during the life of the covenant. Sometimes the debtor defaults on his credit redemption obligations even before the institution becomes acquainted with them. In this case, the beneficiary must use a debt recovery process to obtain reimbursement of the outstanding amount.
In the event that the debtor does not reimburse the credit, the institution may assert a debt against the debtor or attempt to obtain the guarantee. If the credit is not secured, the only remedy available to the beneficiary is a right of recovery. Borrowers may violate the credit contract for various causes, such as bad faith, incapacity, invalidity, death, winding up and insolvency.
To a certain degree, the institution may be exposed to a higher level of credit exposure to individuals than to business debtors. Tracking the location of an actual borrower after lending is challenging for the institution. The inclusion of an explanatory and enabling provision in a credit contract can resolve this issue.
It may provide that, in the case of delay, the Mortgagor waives all his rights in relation to the repayment of the Term Loan on the part of the Borrowing House and agrees that the Borrowing House shall have the right to authorise its affiliated companies or debt collectors in other jurisdiction to recover the amount of the Term Loan due or in arrears.
Also, a banking institution can bring an action against the Chinese creditor and try to get the verdict passed in another country. For reasons of expediency and effectiveness, some commercial banking institutions will institute legal proceedings to recover debt in the area where the borrower's ownership is situated. There will be more redress available to the EIB if the credit is a guaranteed one.
Under the PRC Guarantee Law, which regulates mortgage loans, the PRC allows the PRC banks to deal with the creditor to transform the pledged ownership into currency or resell the ownership to repay the loans, for example, if the PRC banks do not repay the loans at the end of the life of the loans. In the event that the contracting partners are unable to agree on a purchase, the creditor of the security right over real property shall be entitled to assert a receivable against the creditor of the security right over real property by means of a legal action.
Agreeing on the disposal of the pledged asset will be challenging for the transaction for the bank and the mortgage holder. Exercising its right in court proceedings will also be unpleasant for the institution. Therefore, in the credit contract, the borrowers and the bankers often require that, if the debtor violates the contract, the owner can resell the goods and the mortgage holder willingly renounces all material and legal claims against the creditor.
An executable authentication test is performed on the credit facility to establish its executability. Simultaneously, both sides shall present evidence of the person's ability to sign and the authority to sign issued by the Mortgagor if the Mortgagor is not a signatory of the Contract of Lending or other document or deed requested by the Solicitor.
Upon completing the transaction, if the Mortgagor violates the Credit Contract, the Customer may request the Real Estate to be auctioned directly at the Courts. Failure to collect may turn the credit into a bad claim and the merchant must try to resell the claim for money. So far there has been no possibility for China's banking institutions to exchange their bad debts for non-performing loans.
In the last four years, however, several wealth managers have been established in China to buy the non-performing loans from the bank. There will be more and more opportunities to resell non-performing loans with the growth of business banking and the recapitalisation of state-owned Chinese banking institutions.