By Liu Zhiqiang

Before the current credit tightening began, bank staffers would try every means possible to loan money. It was not unusual for them to go up to entrepreneurs' doors in the blistering heat and try to convince them to borrow.

But now things are different.

These days, it is the entrepreneurs who are taking every advantage of their personal and business networks, or guanxi, to get bank loans. They will try every means possible, including bribery.

This role reversal, if not managed properly, will likely create another risk, besides management, for lenders.

So, commercial banks should take action to fend off any possibility of corruption among their staff. And they should take action now.

As the central government takes draconian measures to cool down some overheated sectors - such as real estate, cement, auto, aluminium and steel - bank authorities are tightening loan lending accordingly.

Under these circumstances, some project developers will try to get local government's assistance to secure bank loans.

On the other hand, some commercial lenders will take it for granted that since the local government is supporting the project, there will be lower risks, not knowing, however, that the project might well be redundant or poorly financed, and their loans might become non-performing.

In a time of credit tightening, guarding against moral corruption becomes an urgent task for commercial lenders, especially Chinese banks who have already been heavily burdened with mounting non-performing loans.

Theoretically speaking, everybody in banks, from top policy-makers to managers and loan operators, can be corrupt.

Most domestic lenders are state-owned. It is understandable that top officials and policy-makers, such as board members, do not care as much as they should about the profitability of their banks. And there is a possibility any wrong decision will have little or no consequence.

Managerial officials may approve loans sometimes just to appease their bosses and sometimes due to loose administrations.

Low-level loan operators are the most vulnerable. They are accessible to various information sources. If there is no strict risk control, they may have abundant opportunities to get something for nothing.

To reduce the risk of corruption, commercial lenders should first of all provide more ethical training. They should persistently remind their staff not to accept briberies and commissions.

A strong anti-corruption philosophy is the most crucial "Great Wall."

However, ethical education is a costly and time-consuming process if bank staff receive it passively. Therefore, a better way is to create an appropriate management system and corporate culture and establish intimate relations between the banks and their staff.

The ultimate goal is to install pride among the staff who work there and are part of the team.

Meanwhile, commercial banks should also set up a series of regulations. Let the regulations, instead of the governor or any other official, have the final say about whether to issue the loans or not, to whom and how much.

These regulations and standard operational rules are the most effective way to squeeze out corruptions.

The internal authorization system should be transparent and responsibilities of every position be clear. The more detailed the rules are, the better.

The rules should be timely and market-oriented. They should stay stern against local governments' image or achievement projects.

For now, they should also be strict on credit approval to land, real estate and infrastructure projects.

Banks should speed up loan growth at a controlled pace and steer clear of overheated sectors.

Only then will they cut the ratio of non-performing loans.

Another effective way to reduce credit risks is to implement a reasonable penalty system. Officials and staff involved in bad loans, excluding those resulting from natural disasters and wars, deserve severe punishment. They should take political, economic and legal responsibilities.

China Banking Regulatory Commission also has its crucial role to play in cracking down moral corruptions in commercial banks.

For example, the commission can establish a database of financial service practitioners and disclose which ones have been involved in wrongdoing.

That may prevent banks from hiring these unqualified people and warn all practitioners to watch their step.

The author is an independent contributor to China Business Weekly.

(China Daily July 29, 2004)