Chinese bank fined over multibillion-dollar bad-debt cover-up

China’s banking regulator has slapped a 462 million yuan (US$72 million) fine on a bank branch over a massive shell company fraud, as Beijing continues to crack down on financial risks.

The China Banking Regulatory Commission said Shanghai Pudong Development Bank’s Chengdu branch – which had long claimed to have “zero” non-performing loans – falsified loan applications and granted other unapproved funds to cover up its pile of bad debts.

In all, the branch issued 77.5 billion yuan in credit to 1,493 “empty shell” companies, in a scam that Chinese financial media group Caixin said could run to 10 billion yuan in losses.

The branch’s former president and two vice-presidents were banned for life from banking and another 195 staff members were punished for the widespread fraud, the CBRC said in a statement on Friday.

Bad loans continue to haunt mainland lenders despite better-than-expected showing in first quarter

The Shanghai-based bank said in a statement on the weekend that it admitted the wrongdoings and fully accepted the punishment.

It apologised to investors but added that the fine would not have a big impact on its business operations.

The bank also said its Chengdu branch had complied with the CBRC’s request for remedial action to ensure that “overall risks were under control with no impact on client interests”.

Neither the commission nor the bank said how much they expected the losses to total.

The revelations come as the bank reported a net profit of 54.2 billion yuan for 2017, up by 2.2 per cent from 2016. According to its annual reports, its non-performing loans ratio rose to 2.14 per cent in 2017 from 1.89 per cent in 2016, 1.56 per cent in 2015, and 1.06 per cent in 2014.

But the scandal has renewed concerns about the quality of the lender’s loan data and that of the broader Chinese banking system.

According to the commission, the Chengdu branch had been extending questionable loans for years but the bank’s internal control systems failed to flag any risks.

China’s ‘significant obstacles’ in its battle against financial risks

The branch “dressed up financial statements and made up profits” to improve its position within the bank, with the irregularities penetrating various operations from bank loans to interbank lending and borrowing and wealth management, the regulator said.

The CBRC did not say which shell companies were involved or how they were used. But often when a borrower’s loans at a bank are likely to sour, the bank will ask a shell company to buy the borrower’s troubled loans and then make a new loan to the shell company. In doing so, a risky loan is covered up as a viable one.

The commission, headed by Guo Shuqing, said the investigation and punishment of the branch was part of the CBRC’s efforts to prevent financial risks.

President Xi Jinping has made tackling financial risks one of three top priorities for Chinese cadres over the coming years, along with environmental management and poverty alleviation.

The CBRC fined China Guangfa Bank 722 million yuan last month for offering illegal guarantees for defaulted corporate bonds.

Throughout 2017, more than 1,800 banking institutions were ordered to pay a combined 2.9 billion yuan in fines, it said.