Market, page 19
Issue 501, January 3, 2011
Translated by Guo Wei
Original article: [Chinese]
During the last two months of 2010, the China Banking Regulatory Commission (CBRC) conducted a large-scale inspection of the credit conditions of China's commercial banks.
The inspection was focused on evaluating the implementation of a new set of rules called "Three Methods, One Direction" (referred to as New Rules below) that were introduced to cover loans issued by commercial banks in October 2009.
An individual close to the CBRC said, despite the fact that many insiders expected there would be difficulties with the process, according to preliminary results show that 70 percent of loans met the requirement standards and were basically conducted in line with the new regulations. The CBRC required the commercial banks responsible for loans that did not meet the standards to correct their errors accordingly.
Year-End Inspection
It has been reported that the end of the year inspection included three steps. The first step required commercial banks to conduct an internal audit to determine if they had met the requirements included in the New Rules such as stipulations on contracts and adjustments to their IT systems.
The second step, and the core of the examination, involved on-site inspections of local banks by the CBRC focusing on the areas of banking financial institutions and loan products which were recognized as vulnerable or had previously never been inspected.
A local official with CBRC told the EO, the inspection focused on three seperate kinds of loans issued by commericial banks.
For fixed assets loans issued by commercial banks, the CBRC inspected the qualifications of investors, their management aptitude and whether they met industry and related government policies.
For the cash flow loans, the CBRC checked if the loan size was calculated according to the borrower's capital requirements and received an appropriate line of credit.
As for personal loans, the CBRC inspected whether banks were meeting the strict requirements of the face-to-face loan signing system.
In the next step regarding payment, the CBRC primarily conducted on-site inspections on the circumstances of commercial bank loan payments. As required, banks should confirm the borrower's information beforehand, and then send the loans to the other party engaged in the transaction with the borrower (i.e the seller of a house) from the borrowers account.
In addition, after sending the loan, the CBRC determined whether banks had established the early risk warning and borrower monitoring system. For fixed loan customers, the CBRC required commercial banks to regularly inspect the borrowers and those responsible for the loan project's contract execution, credit standing, project construction, operational conditions and changes to loan guarantees. But for the working capital loans customers, they had scheduled and unscheduled onsite inspections of borrower's management, finances, credit, payment, guarantees and financing quantity changes in order to strengthen the monitoring of capital loans.
As for individual clients, they would regularly inspect their credit, changes to guarantees, and contract execution.
A source informed the EO that in order to guarantee the reliability of data collected, the CBRC asked that the rural financial institutions and foreign banks cooperating in the inspection process inspect no fewer than 20 percent of their organization, and foreign banks inspect no less than 20 percent of their foreign investment bank structure (including their institutions and subsidiary branches).
The number of fixed assets loans and working capital loans inspected was required to be no lower than 1 percent of the total loans that existed at the time the New Rules were issued in September 2010.
The CBRC also required the inspection of at least 5 percent of personal loans that had been issued since the New Rules were introduced.
On this basis, the CBRC established an oversight organization led by the Banking Regulatory Commission to oversee inspection throughout the country in December 2010.
According to the inspection plan, the results of local inspections were to be reported to the CBRC before December 15th.
Risk Control
An individual close to CBRC said the initial results of the inspection of the implementation of the New Rules surpassed expectations, with 70 percent of loans meeting the requirements.
"Among them, fixed asset loans had the best results. More than 50 percent of the more difficult to monitor cash flow and personal loans were up to standard," the above source said.
Zhao Qingming, a senior researcher at the China Construction Bank said that the New Rules had been effective at controlling the quality of commercial bank loans and have had a positive impact, especially after the large influx of credit which took place in 2009.
In actuality, many commercial banks have complained that the "commissioning payment" and "calculating the actual demands of lenders" aspects of the New Rules had caused a lot of trouble.
A high-level ICBC staff member told the EO, "The whole market competition rules have completely changed since 2009. After credit was released, everyone desperately fought for large clients and institutions, offering interests rates 10 to 15 percent below the normal rate. No one was driving a hard bargain like before, because if you didn't provide a loan, plenty of your competitors would."
An Agricultural Bank employee also revealed, that many central-owned enterprises and state-owned enterprises who are part of larger conglomerates and apply for credit through the group, not their individual enterprise, which means it is very hard to gauge the liquidity or monitor loan usage.
If we only granted loans to projects that were in accordance with the "commission payment," a lot of enterprises would not make the grade.
Nonetheless, the New Rules helped soften the impact of the massive increase in loans in 2009.
A source with the risk management department of a large commercial bank told the EO, judging from the last three quarters, non-performing loans have fallen by double since the beginning of 2010. The risk of local financing platforms has also been controlled, as has the risk associated with housing loans and personal mortgages.
Zhao Qingming stated that according to requirements announced at December's Economic Work Conference, commercial bank credit will gradually return to normal.
In 2009 loans were close to 10 trillion yuan, and in 2010 they were about 7.8 trillion. The current goal for 2011 is 7.5 trillion.
He said, "in the long term, the problem of how to control the amount of credit risk will gradually become more important."
This article was edited by Rose Scobie and Paul Pennay
