Action on illegal loans

PUBLISHED : Tuesday, 15 August, 1995, 12:00am
UPDATED : Tuesday, 15 August, 1995, 12:00am

THE People's Bank of China has sent out a directive ordering state banks to stop their branches arranging illegal loans for customers through credit cards.

The warning came after the central bank discovered that the Zhuzhou branches of the Agricultural Bank of China (ABC) and People's Construction Bank of China and the ABC Guiyang branch were extending overdrafts to customers through their credit cards.

The Shanghai Financial News said yesterday the three banks' branches also tried to collect deposits in the course of their credit card operations, violating the rules set by the central bank.

To stop this back-door method of lending spreading, the People's Bank has ordered that the banks' branches end the practice immediately, or face appropriate penalties if they do not. It said any overdrafts extended to customers through credit cards must be reclassified as normal loans and should be recalled as soon as possible.

Other than the reserve deposits and guarantee placed by credit card holders, banks are not allowed to accept other forms of deposits.

Analysts said under the country's austerity drive to rein in inflation, banks were given a lending quota and were not allowed to lend indiscriminately to customers.

Under the People's Bank's instructions, only profitable and efficient enterprises should get priority in the second half of the year when they applied for loans.

The result was that many loss-making enterprises - unless they faced drastic situations - would find it hard to borrow from banks, they said.

To work around the credit squeeze, some banks tried various ways of lending to favoured clients and one of the methods used was to extend overdrafts as part of their credit card operations.

The People's Bank made no mention of a scam reported last week at the Bank of China's Zhongshan branch, where three men allegedly tried to swindle US$72.3 million in a credit fraud.

Personal cheques are not available in China which has made credit cards increasingly popular with some cash-rich mainlanders.

Analysts said, however, that because modern electronic checking systems for credit cards were not extensively used across the mainland, the chances of fraud were higher.

Credit cards were not easy to obtain because of the state bank's strict requirements, including a guaranteed deposit by the applicant, as protection against default, the analysts said.