Move will make it easier for lenders to extend credit
The nation's top legislature decided over the weekend to scrap a two-decade cap on commercial banks' loan-to-deposit ratios (LDRs), a fresh move aimed at supporting the real economy as growth slows.
The Standing Committee of the National People's Congress on Saturday approved an amendment to the Law of the People's Republic of China on Commercial Banks, removing a stipulation that limits the funds commercial banks are allowed to lend at 75 percent of their deposits, effective October 1.
The move, which marks a major overhaul to the supervisory system for China's banking sector, comes just days after the People's Bank of China, the central bank, announced a cut to key benchmark interest rates and a reduction to banks' reserve requirement ratios (RRR) to bolster the slowing economy.
Experts believe the move is another regulatory effort to help alleviate the financing difficulties in the real economy.
"Despite the central bank's recent monetary easing measures such as interest rate and RRR cuts, financing support by banks to the real economy remains relatively weak," a banking analyst surnamed Sun, who declined to disclose his full name or employer, told the Global Times on Sunday.
"Given the downward pressure facing the economy, it is necessary to improve banks' lending capacity to boost growth," Sun said.
The China Banking Regulatory Commission (CBRC) said that the LDR will still be used as a liquidity monitoring indicator for commercial lenders.
The cap was originally intended as a safeguard against an overextension of credit. Yet, with the development of the economy and financial sector, the LDR has become unsuitable for commercial banks' needs in the diversification of assets and liabilities as well as business innovation and development, the Xinhua News Agency reported Saturday, citing CBRC Chairman Shang Fulin.
"Many new businesses such as wealth management products are not subject to the LDR requirement as they are off-balance-sheet vehicles. In this sense, the LDR can no longer properly play a role in supervising a bank's lending," Xi Junyang, a professor with the Department of Finance at the Shanghai University of Finance and Economics, told the Global Times on Sunday.
"Also, most large banks' actual LDRs are much lower than the 75 percent cap," Xi said.
Meanwhile, LDRs at many small and medium-sized banks are approaching the 75 percent limit, meaning that the scrapping of the ceiling may support their lending to rural areas and micro-sized enterprises, Xinhua reported on Saturday, citing Guo Tianyong, a professor at the Central University of Finance and Economics.
"Against the backdrop of the faltering economy, banks may not be willing to issue too many loans, even if they technically can, as they are concerned about the risks," Sun noted.
