Banks forced to put backdoor trust loans on the books
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For years, banks have been skirting the regulator's loan limits by selling trust company products through semi-legal channels. Now the China Banking Regulatory Commission (CBRC) has cracked down, forcing banks to put these backdoor loans on their books, a move that may lead to a slowdown in lending and a weakening of banks' profits.
The CBRC issued the notification Tuesday, Zhang Shengbao, an official at Beijing Banking Regulatory Bureau, the local regulator confirmed.
The CBRC's new rules require banks to limit sales of trust loan products to 30 percent of the total bank-trust wealth management products, and transfer these off-book sales onto their books before the end of next year, and set 150 percent of loan loss reserves for that part as they do for traditional lending.
Meanwhile, the CBRC requires banks to have capital adequacy ratio of 11.5 percent and 10 percent for large and smaller banks respectively. The percentage will now include the backdoor loans.
Banks often use trust funds to lend to developers and local government projects under the name of wealth management products, which keeps the money off the banks' books.
The CBRC suspended the sales of bank-trust products in early July due to uncontrolled off-book lending through bank-trust products which reached as high as 2.9 trillion yuan ($428.36 billion) in the first half of the year, far more than the 1.78 trillion yuan ($262.92 billion) of last year's total.
"The off-book items is expected to be subject to the general lending quota, which means banks might have to lend less in the remaining months, said Lu Zhengwei, senior analyst with Industrial Bank.
The CBRC's lending quota for this year is 7.5 trillion yuan ($1.11 trillion). The total new lending of the first seven months was 5.17 trillion yuan ($763.66 billion).
CBRC declined to disclose details for the new rules.
The rules will erode banks' profits as they need more reserves from their profits to handle the trust loans now on their books, said Zhang Youxian, analyst with Bank of China's Institute of International Finance.
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