New banking risk system lauded
By Zhang Dingmin (China Daily)
Updated: 2004-02-24 14:30

Chinese experts on February 23 lauded banking regulators' new system designed to evaluate risks at joint-stock commercial banks, but stressed that an improved operating mechanism is the final solution to risk prevention.

The China Banking Regulatory Commission (CBRC) unveiled the risk rating system for the nation's 11 joint-stock commercial banks on February 22, covering key areas like capital adequacy, asset quality, management performance and profitability.

The system, the first of its kind in China, contains measures to evaluate key indicators both on a qualitative and quantative basis, and provides differentiated regulatory treatment to banks with different ratings.

"It's very detailed, and covers all the major areas that should be covered," said He Minhua, vice-president of China Chengxin International Credit Rating Co Ltd, a major rating firm in the Chinese market. "I think it's workable," she added.

Niu Li, a senior analyst with the State Information Centre, said the new system is a further step by the banking watchdog to tackle financial risks, a big obstacle plaguing the Chinese banking sector.

"Financial reform just has to stop lagging behind, or it will be difficult for banks to survive," he said.

The local market is scheduled to be fully opened up to foreign banks by the end of 2006 as part of China's World Trade Organization commitments.

The risk rating system, the results of which the CBRC said will be included in qualification requirements for senior bank executives, is expected to play a role in rationalizing lending decisions, and subsequently bringing down non-performing loan ratios, analysts said.

Chinese Premier Wen Jiabao told the nation's financial regulators earlier this month that an expansion in bank loans last year had fuelled over-investment in some industries like cement and steel.

Major reasons behind the banks' blind lending behaviour include a desire to grab a bigger market share despite high costs and risks, and inadequate oversight on lending decisions, Wen said.

The new rating system gives greater weight to the capital adequacy ratio, which requires banks to be careful when granting new loans that will bring down the ratio.

Still, Wang said:"What is at the root (of risk prevention) is not technique or criteria. We need to really see a new operating mechanism at those banks."

A number of joint-stock commercial banks are already listed on the stock market or have ushered in foreign investors, both moves aimed at bringing about a more commercially based operating mechanism.

Earlier this year, the CBRC expressed support to foreign investors buying stakes in the joint-stock commercial banks as a way of accelerating their reform.

With a shorter history than the four largest State-owned banks, they are among the healthiest of the Chinese banking sector.

The 11 lenders reported an average non-performing loan ratio of 7.92 per cent at the end of last year, in comparison with 20.36 for the four State-owned lenders.

Their outstanding volume of non-performing loans was 187.7 billion yuan (US$22.6 billion) at the end of last year.

Seven of them have a capital adequacy ratio above the minimal regulatory requirement of 8 per cent.

Yet the vast majority of China's banking institutions, including 112 city commercial banks and more than 30,000 rural credit co-operatives, fail to meet that requirement.

Some analysts challenged the CBRC's decision of publicizing the rating results for the time being.

The CBRC said it would only make public the results of relevant departments, and will decide when to start publishing the ratings later.

"Because it's a tentative regulation, it's likely that it needs some further improvements," He Minghua said.

The ratings would be helpful to regulators, but He said it should not be the regulators but independent rating companies that publish bank ratings for the public.

"We need a more market-oriented way to do that," she said. "If the rating is done by an independent rating company, it will better serve the public."