Monday, August 25, 2003 (South China Morning Post)

China mulls over tighter rules to control loan risks
Draft law would greatly amend supervision policies and focus on reducing bad debt loads





China's top legislature is considering big changes in the banking supervision policies to put more emphasis on risk management by bank watchdogs, state press said yesterday.

The bank supervision draft law, the first of its kind in China, seeks to change supervision policies from simply monitoring the legitimacy of operations to putting equal importance on both legitimacy and risk control.


China Banking Regulatory Commission (CBRC) chairman Liu Mingkang said that under the law the commission would establish guidelines to exercise cross-border supervision together with bank watchdogs of other countries and regions.

It would also set up effective guidelines to minimise financial risks for commercial banks, Xinhua reported.

Under the draft law, the CBRC is authorised to oversee all banks and financial institutions in China, investigate illegal banking operations and administer punishments for violations of the law.

Since the CBRC was founded on April 28, it has carried out a series of measures to control banking risks, including investigating the non-credit operations of the four state-owned commercial banks.

It has announced that all domestic banks, both state-owned and joint-stock ones, are required to adopt the commonly accepted rules to sort loans into five grades, from best to worst, next year.

Despite its efforts to impose more stringent risk control standards on China's banks, poor management and huge debt loads are hampering progress.

The CBRC has also reportedly met considerable resistance at the central bank, which has seen its once immense powers over the financial sector gradually reduced to leave it now in charge of just monetary policy.

According to Xinhua, China's domestic banks reported a 19.6 per cent non-performing loan rate by the end of June, totalling 2.54 trillion yuan (HK$2.38 trillion).

Experts have noted there is only a short time left for the country to deal with the problem loans before foreign banks enter the market.

Amendments to the Law on Commercial Banks were also being considered, Xinhua said.

Being independent, profit-seeking businesses, state-owned commercial banks will no longer be required to grant policy-orientated loans at the request of the government, according to the draft amendment.

At present, state-owned commercial banks receive compensation from the State Council if losses result from the policy-orientated loans.

The new draft law loosened the limits on investments by commercial banks, in a bid to meet the needs of the rapidly growing sector, said Mr Liu, formerly the president of Bank of China.

The present law bans commercial banks from investing in non-financial institutions or enterprises, or running securities or credit businesses.

Another amendment draft, of the Law on the People's Bank of China, recommends that the central bank's currency policy committee play a more crucial role in steering the mainland's macro-economy.

It deletes items concerning the central bank's supervision and regulation of banks and financial institutions, as this is now handled by the CBRC.

The measures will be debated from Friday by the National People's Congress Standing Committee.