Chinese bank named and shamed for hiding loan risks

Banking watchdog fines credit cooperative in Liaoning for cover-up

PUBLISHED : Friday, 23 June, 2017, 9:00am
UPDATED : Friday, 23 June, 2017, 4:06pm

A rural credit cooperative was publicly named and fined by the banking regulator for covering up loan risks, shedding light on problems with the quality of data on lending in the country.

The Gaizhou Rural Credit ­Cooperative, a deposit-taking ­institution in Liaoning province, was fined 200,000 yuan (HK$228,000) for “incorrectly rating and classifying its loans”, according to a notice published on the China Banking Regulatory Commission website on Wednesday. Sun Qiao, a clerk from the cooperative, was fined 50,000 yuan.

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China has hundreds of cooperatives across the country, acting as regional banks. Details about these credit cooperatives are scarce, because they do not disclose information about their asset quality or operations.

A cooperative with sufficient capital and sound management can be incorporated as a proper commercial bank. China has more than 1,000 such banks, and their non-performing loans (NPL) ratio was 2.55 per cent at the end of March. The Guangzhou Rural Commercial Bank, one of the largest, raised HK$7.2 billion in a Hong Kong IPO this month. It was a rural cooperative until 2009.

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The regulator did not give specifics about the wrongdoings at the Gaizhou institution.

The official NPL ratio in the mainland’s banking system has remained below 2 per cent since 2009. It was 1.74 per cent at the end of March, unchanged from the end of last year. These official figures have been questioned, but there is no concrete evidence to challenge them with.

Banks across the country adopted a five-tier classification system for loans in 2004. Loans that are more than 90 days overdue are classified as non-performing, and banks have to set aside capital to cover these substandard loans.

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The system was established after Beijing spent trillions of yuan in taxpayer money on bailing out the state banking system in 1999, when at least a third of loans were non-performing.

The NPL ratio is also a key measure for the regulator to measure bank performance with. But the lenders have adopted a number of methods for keeping the ratio low, including rolling loans over, swapping debt for equities and shifting problematic loans off the balance sheet.

Ratings agency Fitch said in a recent report that China’s bank credit picture “continues to become more complex and the financial system increasingly interconnected, making it harder to assess underlying risks”.