CBRC tightens grip on bank loans

Lenders told to limit credit to financing vehicles of local governments and prevent risk contagion after loans to the sector rise to 18pc of GDP

PUBLISHED : Tuesday, 16 April, 2013, 12:00am
UPDATED : Tuesday, 16 April, 2013, 5:50am

The mainland's banking regulator has escalated its warnings about lenders' exposure to local government financing vehicles (LGFVs).

Loans to these financing vehicles have increased to 18 per cent of gross domestic product as non-bank credit pours into the risky sector.

The China Banking Regulatory Commission recently issued a circular outlining steps to tighten its grip on these loans.

The measures included containing credit to substandard financing vehicles, prohibiting banks from guaranteeing bond issuances by LGFVs and setting up comprehensive records monitoring lenders' exposure to the sector, bankers briefed about the move told the South China Morning Post.

The commission was not available for comment yesterday.

"The prudent stance is generally a continuation from last year, but this time the regulator stressed preventing risk contagion from non-bank financial entities," said Fang Yan, an analyst at Guosen Securities.

Financial institutions' exposure to LGFVs has been growing, thanks to the 4 trillion yuan (HK$4.54 trillion) stimulus Beijing introduced to combat the 2008-09 global financial crisis. Much of the money that poured into the economy from banks, trust firms and bond markets has since flown to these vehicles to finance the construction of unpromising infrastructure projects.

Many economists have expressed concerns that the mainland's urbanisation initiative, highlighted by the new leadership as a major driver of the economy, would provide a fresh incentive for local governments to get their financing arms to raise funds and invest heavily.

Banks should prevent risk contagion by setting up records of their indirect exposure to these vehicles through the holding of bonds, trust products and wealth management products, and better match assets with liabilities, the bankers quoted the CBRC as saying in the circular.

Only bank headquarters have the authority to buy and hold bonds issued by LGFVs, and lenders are prohibited from backing debt issued by them.

Banks should contain the size of loans to LGFVs and ensure new loans would only be extended to firms with a debt-asset ratio of lower than 80 per cent and liabilities completely covered by cash flows generated by the project being financed, the CBRC said.

For "substandard" financing vehicles - whose liabilities are less than 100 per cent covered or where debt accounts for more than 80 per cent of assets - banks should scale down new lending to them and ensure the proportion of their loans to LGFVs is no higher than last year's level.

New credit could only be advanced to a limited range of LGFV borrowers, including builders of legal toll roads and key projects endorsed by the State Council, the regulator said.

"The rules are not very stringent, which shows the regulator still wants to support key infrastructure projects to help with the economic recovery," an analyst at a brokerage in Beijing said.

Fitch Ratings downgraded the mainland's local-currency sovereign debt rating last week to reflect growing financial risk.