Bank lending has grown so fast that the loan-deposit ratio for some Chinese shareholding commercial banks is well past the warning level, the central bank has warned.

 

For commercial banks, the higher the ratio – the amount of a bank's loans divided by the amount of deposits at any given time – the more the bank is relying on borrowed funds.

 

Article 39 of the Commercial Bank Law of the People's Republic of China stipulates that the ratio of outstanding loans to outstanding deposits in Chinese commercial banks may not exceed 75 percent.

 

But statistics from the People's Bank of China (PBOC) suggest the loan-deposit ratio in some branches of major shareholding commercial banks has approached or even topped 100 percent.

By the end of September, the loan-deposit ratio in the Ningbo Branch of Industrial Bank had reached 98.1 percent. Similarly, the figures for the Ningbo branches of Mingsheng Bank and China Merchants Bank had jumped to 128.35 percent and 100.81 percent respectively.

 

The loan-deposit ratio for all local banks in Ningbo, one of the booming cities in the east China province of Zhejiang, averaged 87 percent at the end of September, according to data from the Bank Loan Registration System of the PBOC.

 

Meanwhile, Guangzhou-based 21st Century Business Herald said the loan-deposit ratio for China Everbright Bank had reached 77.6 percent as of September 20, citing statistics from the headquarters of the bank.

 

The alarming figure has prompted the bank, one of the country's leading shareholding commercial banks, to issue an urgent notice, asking all branches to tighten lending policies.

 

"Given a growing loan-deposit ratio and decreasing capital adequacy ratio, the loans in our bank have seen too fast a rise to impose some pressure over our capital liquidity," the notice said.

 

Branches of the bank were, therefore, urged to attract more deposits and be more cautious in granting new loans.

 

In fact, the soaring loan-deposit ratio has already caused capital shortage in some shareholding commercial banks, which is partly reflected in the active inter-bank lending market.

 

In order to ease their tight funds supply, some capital-starved small- and medium-sized banks have been forced to sell their loan assets to their counterparts.

 

The emerging problems with these shareholding commercial banks are typical of the overall picture of excess bank lending, which economic researchers said carry high financial risks.

 

At the end of September, outstanding lending by all financial institutions jumped by 23.7 percent year on year to 16.65 trillion yuan (US$2.01 trillion), 5.3 percentage points higher than last year.

 

In the same period, new loans by all financial institutions totaled up to 2.7 trillion yuan (US$326.4 billion), 745.9 billion yuan (US$90.19 billion) more than all they lent for the whole of last year.

 

Yi Gang, director of the Monetary Policy Department of the PBOC, admitted that the growth in credit was quick despite the central bank's precautionary measures.

 

He cautioned that excess lending, if not effectively checked, may lead to serious problems to undermine the entire Chinese economy development:

 

l         A fast rise in money supply may push up the consumer price index, triggering runaway inflation.

 

l         Excessive loans may result in investment duplication and aggravate oversupply in some red-hot industries, which in turn will fuel price wars, causing deflation.

 

l         Capital bubbles may emerge in the property and stock market to breed the so-called bubble economy, the bursting of which may drag the Chinese economy into a long-term recession.

(China Daily November 9, 2003)