Need for more provisions on bad loan fears


CHINESE financial institutions have been required by authorities to allocate more provisions to cover possible rises in loan impairment amid a slowdown in the world's second-largest economy.

In a move to tighten the banking sector's risk prevention and control, the Ministry of Finance ordered financial enterprises to keep 1.5 percent of their gross loans as general provisions beginning in July, up from the existing 1 percent.

The new "dynamic provision" rules will apply to policy banks, commercial banks, finance companies, urban and rural credit cooperatives, lease financing firms and financial asset management firms as well as small town- and village-based banks.

To ensure a smooth transition, financial enterprises will be given a grace period of five years to meet the new regulatory standard.

Under the existing rules, financial asset management firms and small town- and village-based banks are not subject to the regulation in this regard.

The new rules aim to "boost the banking sector's ability to guard against risks" and make financial enterprises' reserves for loan losses "more predictable" and better reflect changes in the economy, the ministry said in a statement posted on its website yesterday.

In calculating potential risky asset value, the ministry also raised the weighting of sub-prime loans from 25 percent to 30 percent, while setting the weighting for suspicious loans at 60 percent and losses at 100 percent.

China categorizes bank loans into five levels - normal, monitored, sub-prime, suspicious loans and losses. Sub-prime, suspicious loans and losses are usually considered to be bad loans.

The new rules came following public criticism of the huge profits Chinese banks made last year despite a slowdown in the country's economy.

China's banking sector reported a combined net profit of 1.04 trillion yuan (US$165.3 billion) in 2011, 15.8 percent higher than a year ago, according to the China Banking Regulatory Commission.

China's gross domestic product grew by just 8.1 percent in the first quarter of this year, slowing from 8.9 percent in the fourth quarter of last year and marking the slowest expansion since the second quarter of 2009.



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