China tells banks to pass excess loan provisions to investors

SHANGHAI: China’s banks will need to distribute excess provisions for soured loans to investors, according to draft rules from the country’s Ministry of Finance that are part its latest attempt to curb accounting malpractice.

Banks with provisions exceeding 300% of their non-performing loan balances would be seen as having “a tendency to hide their profits” and would need to distribute reserves beyond that amount as dividends, according to the draft rules, released yesterday.

The loan-loss provisions have been long seen as a key swing factor for earnings. The ministry is seeking public feedback on the rules through Oct 26.

China’s financial regulators are pressing on with a two-year campaign to reduce risks in the world’s largest banking system by increasing fines on transgressions including inflating deposits, understating bad loans and misusing client funds. While the bad-loan coverage ratio averages 191% across the industry, including at state-owned banks, the buffer stood at 461% at private banks at the end of June, official data showed.

“In order to reflect the true operating results of financial entities and prevent them from using provisions to adjust profits, we will regulate the practice of significantly over-provisioning,” the ministry said in the draft rules.

Bank of Ningbo Co, which has the highest bad-loan coverage ratio among listed Chinese banks, rose as much as 8.7% as of 1:24pm in Shanghai yesterday. China Merchants Bank Co rose 3%, while Jiangsu Changshu Rural Commercial Bank Co surged as much as 9.9%.

The banking regulator last month identified a slew of wrongdoings after on-site checks at some of the nation’s smaller lenders, prompting it to call for tougher supervision. The sector is particularly strained after the government shocked the market by taking over Baoshang Bank Co in late May, and investors have started to price risk differently among weaker and stronger lenders.

Under the latest draft rules, banks and insurers’ fixed assets, including developments under construction, would be capped at 40% of their net assets to ensure the companies have enough liquid assets and refrain from over-investment in real estate. —