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Banks cautious on lending despite rate cut

By Ding Qi (chinadaily.com.cn)
Updated: 2008-10-13 17:08

Although the central bank's latest interest rate cut aimed to inject more liquidity into the markets, the move seems to have had little impact on domestic commercial banks, most of which are reluctant to lend over concerns of fund safety and target pressure, according to a report from Shanghai Securities News on Monday.

"An interest rate cut cannot solve all problems," a credit manager from Bank of Communication's Zhejiang branch told the paper. He said the interest rate is not the major concern of many corporate borrowers since they believe project returns can easily cover the interest cost if the investment is successful.

It is the current economic uncertainties both at home and abroad that make most banks cautious on lending, he stressed.

Zhao Qingmin, senior director with the research and development department of China Construction Bank, agreed. In general, he said, companies tend to remain optimistic about the economic future at the early stage of economic slowdown. Therefore, credit needs remained high driven by various investments. However, to ward off default risks amid the cooling economy, commercial banks have to contract lending in spite of the lucrative market share.

In addition, loan target pressure has also made banks reluctant to lend more. Speaking to the newspaper, an official from the Shenyang unit of the People's Bank of China noted that banks' annual loan target is usually set higher than that of the previous year. So far this year, most commercial banks have completed the loan target this year, so too much lending will add pressure to raise next year's target.

"Given the current economic uncertainty, many bank branches have no idea about the credit market next year. Therefore, the bank I work for will not increase lending for the rest of the year unless it is to some highly-qualified clients," said another credit manager from a large State-owned bank in Jiangsu province.

"An interest rate cut is a signal suggesting the government's resolution to sustain the development of the economy," according to Construction Bank's Zhao. "Although it may not take effect on the substantial economy immediately, it helps to boost confidence in the whole financial market."

Zhao added that in the long run, a looser monetary policy can lift banks' expectations of the economy and expand the credit scale, which will further propel economic development and in turn improve the quality of banks' assets.