Financial regulation

China cuts amount of funds banks are required to set aside for bad loans

China Banking Regulatory Commission ditches ‘one size fits all’ approach and will assess banks individually

PUBLISHED : Tuesday, 06 March, 2018, 7:37pm
UPDATED : Wednesday, 07 March, 2018, 12:06am

China’s banking regulator has eased the amount of funds banks have to set aside for bad loans, which could free up more funds for lending by commercial banks.

The minimum loan loss provision for Chinese banks was lowered to a range between 1.2 and 1.5 times the amount of impaired loans, instead of the 1.5 times before, according to a document released by the China Banking Regulatory Commission dated February 28, seen by the South China Morning Post but not posted publicly. The commission did not respond to a request for comment by the Post.

The new regulation is an adjustment of the previous “one size fits all” approach, which stated that a unified minimum provision coverage for impaired loans be imposed, despite each bank’s capital adequacy and the number of bad loans.

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“The measures, if realised, are quite significant for banks because they can impact their balance sheets. Cutting provisions would mean banks have more capital and can shore up their profitability. For those that are close to touching the 150 per cent red line now, they can use it to improve their balance sheets. But not all banks have the need to do so,” said Zhao Yarui, a senior researcher at Bank of Communications in Shanghai.

Under the new rule, the regulator will decide the specific minimum loan loss provisions for each bank, depending on how much overdue loans to non-performing loans the bank has, how it has dealt with non-performing loans and how adequate is its capital base.

The rule is expected to encourage banks to better manage their bad assets and capital, said Yang Yue, a banking analyst at China Zheshang Bank.

Analysts said the impact on specific banks will depend on their metrics. For instance, if a bank’s capital adequacy ratio exceeds 13.5 per cent, a 120 per cent minimum provision coverage for impaired loans can be applied to the bank.

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In this light, the Industrial and Commercial Bank of China, China’s largest commercial bank by assets, could pass the loan loss provision scrutiny as its capital adequacy ratio is well above 13.5 per cent, but with a 145.8 per cent loan loss provision by June 30, 2017, it would fail to meet the regulatory criterion under the old rules.

The rule is also expected to encourage banks to report the true levels of non-performing loans, because under stringent provision requirements banks tend to under-report their true extent, said Li Qilin, chief analyst at Lianxun Securities.

But even if a bank’s loan loss provision was above 150 per cent, which means in theory it can cut the provision to release profit, it may or may not do this because of its own business considerations, analysts said.