When Convention Meets Suspicion
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The loan-to-deposit ratio fixed at 75% which has been used in China’s banking system for 17 years now meets the challenges from realities. Voices about cancelling or changing this ratio emerged out from everywhere. The reason is that this stipulation is out of date when the market-oriented interest rate, financial disinter- mediation, economic slowdown and monetary policy alternation became main topics in the current economic situation. The ratio restricts the issuance of credit loans. “The loan-to-deposit ratio was fixed several years ago. Now the financial market is developing very fast and the situation has gone through great changes,” said Lian Ping, chief economist from the Bank of Communica- tions. This regulatory index should be changed timely. Expanding the deposit access is operable in a short while but for the long term it should be canceled.
This requirement was legalized by the Law of Commercial Banks issued in 1995. To modify a law needs the approval of the National People’s Congress, the head legislative department in China. In comparison, the China Banking Regulatory Commission (CBRC), which functions as a watchdog, could only tighten or relax the regulations. An insider from the CBRC said that the 75% loan-to-deposit ratio would not be canceled or relaxed but the watchdog could take flexible measures in regulation. “Now banks close to or occasionally breaking through this line will not be severely punished,” said a banker.
There is still a space for the further relaxation in another form. Though the legal stipulation about the 75% loan-to-deposit ratio will still remain here, there is no “definition” about the amount of deposits. Therefore, if the deposit basis is increased as a bigger denominator, it is possible to increase the issuance of credit loans. However, some experts pointed out that the current problem were related with the insufficient demand of credit loans instead of the supply. And banks called for the easing and cancellation for their own interest.
When Rules Meet Changes
“The banks of course hoped for ending or at least easing this regulatory index,” said a source close to the Financial Market Department at the China Merchant Bank. Lu Zhengwei, chief economist of the Industrial Bank, said that the adjustment of loan-to-deposit should see immediate progress for the stable growth of deposits and the supply-demand link of credit loans. The capital market also blamed the restriction from the loan-to-deposit ratio for the depressed new credit increase. Teng Tai, board chairman of Wanbo Fraternal Assets management Company, thought that the loan-to-deposit ratio is an inhibition for the tight capital and it is necessary to erase this financial restrain.
Presently, the check over the loan-to-deposit ratio of banks are held monthly and quarterly and it is very common for banks to have their daily loan-to-deposit ratio pass the alert line.“Both the shareholding commercial banks and the state-owned commercial banks are strained. Big banks are required to keep the 68% loan-todeposit ratio and it is hard to recruit such a large amount of deposits. The commercial banks successfully keep their loan-to-deposit ratio below the 75% alert line every month but they usually break through this line within a month,” said a source close to Chinese banking system.
Shang Fulin, chairman of the CBRC, said in last year that there were 64 commercial banks whose average daily loan-to-deposit ratio was over 75% by the end of September 2011. An interesting phenomenon is that the interest rate for short-term inter-banking lending has a drastic increase in the last days of a month or a quarter. And when the monthly and quarterly check is over, the same interest rate will have a decrease soon.
The worsening financial environment and changes of market this year caused more conflicts between the status quo and the 75% loanto-deposit ratio. Now the counterpart of foreign exchanges is suffering a decreasing growth rate or even negative decrease, various kinds of financing products distract a large amount of deposits, causing the continuous outflow of deposits from banks.
From January to May of this year, the newlyadded counterpart of foreign exchange was 253.55 billion yuan, the lowest point in ten years. Now this figure only equaled the monthly amount several years ago, proving that the deposit is flowing out of banks quickly and ceaselessly..
When Regulations Need Flexibility
Can the call from the market be realized?
An insider from the CBRC said that the 75% loan-to-deposit ratio would not be changed but the regulation might be eased, such as by changing the monthly check to quarterly check.
But is that enough? An insider from a commercial bank said: “The eased regulation could only relieve the restriction but cannot make great changes to the entire credit situation.”
In Lian Ping’s opinion, the current problem is not with “75%” but with the definition and caliber of the deposits. It is recommended that the stable deposits, such as the mutual settlement among financial institutions, should be brought into the scope of general deposits. The said deposit now refers to general deposit from public service departments, enterprises, governments and individuals while the deposits from financial institutions are not within this scope. With the development of direct economic financing and the financial markets, the number of financial products is increasing and the interbanking deposit has an increasing proportion in banks’ total deposits. Meanwhile, due to other emerging factors such as the increased reserve requirement and financial disintermediation,“the concept about deposit is different from the past”. If this kind of caliber is still used as a management pattern for the flow of assets and liabilities of banks.