Banking News
- Banks face battle to stop stock loans
Date: 6-Jul-2007 Sources: (Shenzhen Daily)
THE government is struggling to stop loans from being illegally used for stock purchases because banks lack information on borrowers and are focused on short-term profits, an adviser to the industry regulator said.
'When a company asks for a loan to replenish its working capital, banks have a hard time figuring out whether it's telling the truth,'' Howard Davies, former head of Britain's Financial Services Authority, said in Beijing on Thursday.
Investments with borrowed money have helped drive an 83 percent surge in China's key stock index this year, prompting official warnings of a bubble. The China Banking Regulatory Commission (CBRC) is concerned that banks' pursuit of growth may expose them to the risk of bad loans in the event of a crash.
'Investors are a bit too confident that the Chinese Government will always step in to bail banks out,'' said David Marshall, managing director of Asia financial institutions at Fitch Ratings in Hong Kong.
Loan growth in China has surged, driven partly by demand for money to invest in stocks. Bank lending rose 17 percent in the first five months of this year to 2.09 trillion yuan. More than 28 million brokerage accounts have been opened so far in 2007, more than five times the total for all of last year.
The government spent about US$500 billion bailing out the country's banks in the past decade, according to Moody's Investors Service.
Eight banks, including China's two largest, failed to scrutinize 4.5 billion yuan (US$592.11 million) in company loans illegally used to buy shares, the regulator said last month. Industrial & Commercial Bank of China Ltd. (ICBC) and Bank of China Ltd. were among six lenders fined for not properly overseeing the loans to China Nuclear Engineering Group and China Shipping (Group) Co.
As much as 89 percent of the 2.7 billion yuan that Shanghai-based China Shipping borrowed was used to apply for stocks in initial public offerings, the regulator said. China Nuclear Engineering, a Beijing-based builder of nuclear power plants, illegally used 87.3 percent of the 2.4 billion yuan it borrowed, according to the CBRC's June 18 statement.
'For banks, the reputational risk involved is serious,'' said Davies, director of the London School of Economics and also an adviser to China's stock-market watchdog. 'It's impossible for the CBRC to police every loan, so they're setting these examples to warn the rest of the market.''
Domestic banks may find it difficult to monitor whether companies use loans for their stated purposes, said Fan Zhigang, the Beijing-based vice director of ICBC's Institute of Urban Finance.
'It's getting increasingly difficult for commercial banks to trace the use of loans, especially by big companies that have very diverse sources of funding,'' said Fan. A company may buy stocks using its own funds earmarked for other purposes, such as buying raw materials, then borrow to make up the gap, he said.
Account managers at domestic banks, whose performance is tied to how many loans they make, lack incentives to check that the money is used as intended, said Corinne Neale, head of capital management at Fitch-owned Algorithmics, which helps firms track and model credit risk.
Many banks also don't have the technology needed to gather follow-up information about loans, said Neale, who is based in Singapore.
Domestic banks may overlook risk in some cases because of confidence they'll get their money back from their corporate customers, said Fan Dizhao at Guotai Asset Management Co.
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