Banks un­der­mine in­tent to help small firms

The Star Early Edition - - BRICS FOCUS - En­gen Tham

CHINA hopes that last week’s in­ter­est rate cut will in­crease lend­ing into the econ­omy to shore up flag­ging growth, but mea­sur­ing any rise will be im­peded by a num­ber of tricks the coun­try’s bankers use to ma­nip­u­late the fig­ures.

Chi­nese banks, which are heav­ily con­trolled by the gov­ern­ment, are of­ten in­structed to match their lend­ing prac­tice to fur­ther of­fi­cial pol­icy, and when the Peo­ple’s Bank of China (PBoC) cut rates for the first time in two years on Fri­day, it made it clear that help­ing smaller firms gain ac­cess to credit was among its goals.

Out­stand­ing yuan loan growth slipped to its slow­est in almost nine years in Oc­to­ber, and the PBoC’s ef­forts might well suc­ceed in rais­ing the head­line fig­ures, but bankers say it is com­mon­place to cook the statis­tics to hit tar­gets.

One trick is to ex­tend a loan, but then ask the bor­rower to use a por­tion of the fund to pur­chase wealth-man­age­ment prod­ucts sold by the bank.

Another tech­nique is to re­quire a por­tion of the money lent – any­where be­tween 30 and 40 per­cent, ac­cord­ing to bankers – re­turned as de­posits.

“It’s just in­ter­nally gen­er­ated business through a dummy coun­ter­part,” said Jimmy Le­ung, bank­ing and cap­i­tal mar­kets leader and part­ner at PwC China. The bank­ing reg­u­la­tor has said th­ese prac­tices are il­le­gal, but says only “some com­mer­cial banks” en­gage in them. Bankers say ma­nip­u­la­tion is still ram­pant.

As the world’s sec­ond­biggest econ­omy heads for its slow­est yearly growth in 15 years, au­thor­i­ties have been step­ping up ef­forts to re­duce the cost of fi­nanc­ing for small and medium-sized en­ter­prises, which in­cluded in­struc­tions from China’s cab­i­net to “pre­vent the il­le­gal di­ver­sion of loans and en­sure that loan funds flow di­rectly to the real econ­omy”.

In early Septem­ber, the China Bank­ing Reg­u­la­tory Com­mis­sion (CBRC) posted a no­tice ask­ing banks not to “use un­der­hand mea­sures to il­le­gally at­tract and falsely in­crease de­posits”.

But bankers say the ef­forts are slow and in­ef­fec­tive.

Another banker said agree­ments to re­turn some of the loan as de­posits have now be­come ver­bal.

“The CBRC is feel­ing the stones to cross the river… but bankers have al­ready reached the other side,” he said. – Reuters

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