The Financial Supervisory Commission (FSC) yesterday said that it would begin to enforce tightened rules against unsound banking practices in loans to small and medium-sized enterprises.
Banks have been prohibited from attaching unreasonable requirements as part of their loan approval process for small businesses, the commission said.
These unreasonable practices include demands that a borrower keep a portion of the loan idle at a designated deposit account and pressuring borrowers to purchase financial products such as insurance policies, the commission said.
Small businesses are the most vulnerable to such demands, as they are more eager to comply due to a lack of adequate collateral or favorable risk profile.
Banks have also been prohibited from encroaching on the personal finances of small business proprietors when conducting commercial loan assessments, the commission said.
In the past, small business proprietors were asked to list their personal assets as additional collateral to commercial loans, while some have been asked to take on more personal loans and mortgages or to transfer existing loans from other banks, the commission added.
Market observers have said that such practices was one of the reasons that led to the yuan-linked target redemption forward crisis, which has left many small businesses with massive losses following the Chinese currency’s volatile movements over the past two years, as many banks had pushed the risky derivative to their loan clients.
The commission said that it is working with the Bankers Association (銀行公會) to have these new rules included in banks’ internal control guidelines, Banking Bureau Deputy Director-General Lu Hui-jung (呂蕙容) said.
“Once they are in the guidelines, the commission may initiate enforcement action against violations,” Lu said.
“The severity of consequences will vary depending on the extent of coercion or forceful persuasion employed by banks,” Lu said, adding that past infractions have been classified as isolated incidents, and that it is not a widespread occurrence.
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