The China Banking Regulatory Commission (CBRC) Tuesday promulgated rules governing transactions between commercial banks and affiliated parties.

The new rules, which will take effect on May 1, are a further step by the banking watchdog to tighten the supervision of Chinese banking institutions, many of which are undergoing restructuring.

Such affiliated transactions had led to considerable losses for commercial banks and were a major cause of the massive non-performing loans problem in the banking sector, the commission said.

"Huge risks are hidden in unfair affiliated transactions between commercial banks and their affiliated parties, which seriously undermine the safe and stable functioning of commercial banks," a CBRC spokesperson said.

Non-performing loans accounted for 17.8 percent of total lending by major Chinese financial institutions, or the state-owned commercial banks, policy banks and joint-stock commercial banks, at the end of last year, official statistics indicated.

The new rules give a detailed definition of "affiliated transactions" and list the different types of transactions. Affiliated parties typically include shareholders and senior bank management.

Under the new rules, banks are explicitly forbidden to extend unsecured loans to affiliated parties, grant loans collateralized by shares from the lender itself, or provide guarantees for financing activities by affiliated parties.

(China Daily April 7, 2004)