End of branch quota curbs will push the growth of small banks

PUBLISHED : Friday, 01 May, 2009, 12:00am
UPDATED : Friday, 01 May, 2009, 12:00am

Beijing will ease branch opening requirements for smaller lenders, giving them long-awaited access to new markets and allowing them to better serve small firms and farmers.

The China Banking Regulatory Commission announced yesterday that it would scrap quota controls for medium and small lenders setting up regional branches and simplify the application process by authorising the regulator's provincial bureaus to approve new outlets.

The lengthy process of seeking approval for new branches from CBRC headquarters and a strict case-by-case scrutiny subject to a quota system had restricted the development of smaller lenders, dwarfing them against bigger rivals in asset scale and operational expertise.

The policy will initially apply to joint-stock commercial banks and city commercial lenders.

The authorities aimed 'to improve financial services to the local economy, especially to counties, farmers and small and medium enterprises,' the regulator said, adding the scheme would be expanded.

The government has been cautious about allowing smaller lenders to expand because of concerns about their ability to control risks amid fierce and chaotic market competition. But those worries are giving way to the urgent need to stimulate the economy and prevent social unrest.

'State banks are expanding lending substantially, but most of these are short-term discounted bills and medium- to long-term loans to big enterprises and government-funded projects. Small companies are short of funds,' said Guo Tianyong, a professor at the Central University of Finance and Economics.

Beijing has been pushing banks to lend to SMEs since last year because the sector is crucial to employment. State-controlled lenders reported more loans to small enterprises in the first quarter, but the sector still accounts for a fraction of total loans.

Professor Guo said easing branch opening regulations would speed up expansion of smaller banks, which have weaker links to big state-owned enterprises and mainly serve SMEs.

Yu Xuejun, the head of the CBRC Jiangsu branch, said several banks had been queuing up to apply to expand their branch networks.

'We will mainly assess their management capability, risk control systems and asset quality. Many banks will apply, but we will not approve all of them,' Mr Yu said.

But the economic slowdown may add to concerns about the quality of bank assets over the longer term.

The State Council on Wednesday announced it would lower capital requirements for fixed-asset investments. Though that helps to reduce financing constraints on investment projects, it exposes banks to the bigger challenge of risk control in three to five years, analysts said.

'A quick spur to the economy or a longer-term threat of bad loans? Obviously the government has chosen the former,' said Professor Guo.