Rule that restricts bank loans to 75% of deposits to end
June 29, 2015 Category Finance, Weekly
The Chinese government is to scrap a rule that caps lending by commercial banks at 75% of their deposits, a measure that will increase the supply of cash in the financial system. It will propose amending the nation’s banking law to make the limit a ratio used for reference rather than a regulatory statute. A system will be set up to monitor the liquidity of banks based on the ratio. Changes to the law need to be approved by the Standing Committee of the National People’s Congress (NPC). Premier Li Keqiang is trying to reshape a state-run banking industry that has USD29 trillion of assets, almost twice the amount of its United States counterpart. Deregulating interest rates and easing regulatory controls are part of his efforts to support long-term growth by giving markets a bigger role in the economy. The shake-up is coming five years after the nation completed the stock market listings of the last of its dominant big-four banks. The law limiting lending to 75% of deposits has been in place since 1995. While the loan-to-deposit level for the whole industry was 66% in March, some listed lenders are close to the 75% cap. Bank of Communications’ ratio was about 74% in March, while China Construction Bank’s was 72%. China Securities Co has previously estimated that the removal of the ratio would potentially allow 16 listed banks to release up to CNY6.6 trillion in extra lending. It will allow banks to lend more to the agricultural sector and small businesses. But even with the removal of the lending restriction, bank lending isn’t expected to increase substantially, said Li Qilin, Analyst at Minsheng Securities Co, as banks have become more risk-averse in a slowing economy.
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