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SCMP Reporter

Amultinational company's finance director received a call from a domestic-bank official the other day, wondering if a loan he extended should continue to be rolled over.

 The drift of the conversation went along these lines: 'Your company has not been making money, and we are not sure we should continue to extend credit to you. We have to cut down on risky loans and lending to your company is quite risky.'  Domestic-bank loans to foreign companies are limited to six to 12 month maturity and it is common for borrowers to negotiate for a roll-over.

 The company has been in Shanghai for about three years and reckons it will continue to lose money for three more years before it starts turning in a profit.

  Its finance director bluntly told the official: 'We will continue to lose money for a few more years, which is normal for most companies during the initial start-up period.'  Overseas ventures generally take five to seven years to begin recouping investments they put into the mainland.

 He thought the bank official - who had worked abroad and should have seen how true commercial banks worked - should have known better.

  'Few companies make money in a year or two,' he said.

 The company had no problem servicing the loan, yet the official was still edgy.

 In any case, the default risks were low for the domestic bank, since the loan was fully guaranteed by a stand-by letter of credit issued by the Shanghai branch of a giant United States bank. If there were risks, they were to the US bank, the guarantor.

 So, why was the bank official nervous about a reasonably safe loan?  The answer touches on a crucial aspect of banking, on which reforms have yet to make much impact - the mind-set.

 For all the rhetoric and resolve about commercialising the banking sector, state bankers and their ill-equipped and inexperienced staff remain heavily influenced by the training they received when banks were nothing but government cashiers to dish out policy loans under a national credit quota.

 Valiant attempts have been initiated this year - such as removal of the credit quota and classification of loans into five internationally-accepted standards - to force heads of the state banks to take commercially viable lending decisions.

 There was also an order to banks from Premier Zhu Rongji to slash their ratio of non-performing loans every year - or else.

 Instead of exercising judgment and discretion on how much to lend to whom, banks look at loans and decide indiscriminately the best bet would be to tighten credit for non-profitable enterprises.

 Some take the 'less lending to non-money-making ventures means fewer bad loans' argument further by rejecting most loan applications, giving rise to companies complaining that banks are not lending.

 The result is that mountains of savings sit unproductively in banks, whose interest burden rises with the deposits.

  In a nutshell, most senior managers are not yet able to measure and control the performance of the banks they manage - a problem aggravated by what outsiders believe is vast misinformation in the banking system.

 What is to be done?  For a start, regulators are aware of the acute problems and send more promising officials abroad for training. But it is the top managements of state banks that need a thorough brainwash.

 For without a corporate culture that encourages commercialisation by the bigwigs, officials down the line can do little to develop the skills for making the rigorous and accurate judgments required of true commercial bankers.

 The authorities could also encourage competition, by opening the doors wider to more foreign banks, which will offer young mainlanders opportunities to pick up modern management skills and expertise crucial for banking reforms to succeed.



Credit squeeze by ill-informed bankers a legacy of quota era