Smarting from bad loans to China Aviation Oil (Singapore) Corp (CAO), China's fifth-largest bank vowed yesterday to tighten risk control of lending to quality borrowers. Shanghai-based Bank of Communications (Bocom) would start demanding adequate loan collateral and credit guarantees from quality loan clients, said the bank's president Zhang Jianguo at a televised press conference yesterday, called to launch the $746.59 million Hong Kong retail tranche of the bank's initial public offering. 'We'll draw a serious lesson from the CAO debacle,' said Mr Zhang. Bocom's Shanghai and Singapore branches lent US$36 million of unsecured loans to CAO, which held a monopoly to import jet fuel for China's state-controlled airlines and lost US$550 million in speculative trading of oil derivatives. CAO was saved from liquidation last week when 126 creditors, who were collectively owed more than US$500 million, agreed to accept the company's offer to pay them 56.6 cents for every dollar owed. 'Before we extended the loans to the company, a lot of western banks and domestic lenders were competing to recruit CAO [Singapore] as a quality loan client of theirs,' Mr Zhang said. 'Precisely because of our bank's brand recognition and strength, we succeeded in lending to the company. 'CAO had very strong negotiation and pricing power with banks. As a result, we, like other international and domestic banks, did not obtain collateral for the loans.' In its IPO prospectus, Bocom disclosed a full provision of US$36 million for the CAO loans. Separately, Bocom executive vice-president Peng Chun yesterday played down market fears that last year's 96.5 per cent rise in the amount of special-mention loans - those ranking just above non-performing loans in China's classification system - was a signal of a significant worsening of the quality of its loan book. At 98.39 billion yuan, Bocom's special-mention loans constituted 15.4 per cent of Bocom's outstanding lending. Mr Peng attributed the sharp rise to the adoption of a World Bank-sponsored international loan classification system, which is considered stricter than the domestic five-category loan classification scheme. Under the World Bank-endorsed system, loans to some otherwise creditworthy corporate borrowers with strong cash flows and repayment capacity were reclassified as the domestic equivalent of 'special-mention' because the borrowers could not provide complete financial information for the past three consecutive years and did not meet minimum asset size requirements. 'Hence we believe the overall credit quality of our special-mention loans is good and the credit risk is low,' Mr Peng said. Although regular reviews of special-mention loans had been put in place, he added: 'We don't expect a large portion of special mention loans will deteriorate into non-performing assets.' Bocom chairman Jiang Chaoliang yesterday said the introduction of HSBC as a 19.9 per cent stakeholder last year and Bocom's US$1.9 billion listing in Hong Kong on June 23 would help the lender reposition itself as a retail bank. Retail banking last year contributed 10.1 per cent of its revenue, compared with corporate banking's 63.3 per cent share.