Banking regulator likely to tighten provision coverage ratio policies

The China Banking Regulatory Commission is mulling over a move to adjust the existing non-performing loan provision coverage ratio policies, requiring commercial banks to make the provision-to-total-lending ratio reach no less than 2.5 percent by the end of 2011 at earliest, according to a report by 21st Century Business Herald on Sept. 8.

According to the 2010 interim reports released by 15 listed banks, except for Agricultural Bank of China, which has a ratio of 3 percent, the total provision-to-lending ratio for most listed banks cannot meet the proposed requirement. Of them, joint-stock and municipal commercial small and medium-sized banks will be greatly affected by the proposed adjustment. The provision-to-total-lending ratio for the Bank of Ningbo stands at only a little more than 1 percent.

A source close to the banking regulator said frankly that against the backdrop of a reduction in the balance and ratio of non-performing loans for commercial banks, the material meaning of higher provision coverage ratio requirement will be limited. Adjusting the provision coverage ratio policies aims to reflect the actual non-performing loans situation.

"In the current positive economic cycle, although the non-performing loan ratio of commercial banks seems low and their provision coverage ratio seems high, the provision-to-total-lending ratio is actually not high," the unnamed source said. "The regulator aims to enable commercial banks to meet the provision coverage requirements in various economic circles. Even if the economy worsens in the future, the provision coverage ratio will be high enough for banks to face the adverse situation."

At the end of June 2010, the provision-to-total-loans ratio of the Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, Bank of Communications, stood at 2.4 percent, 3.15 percent, 2.26 percent, 2.5 percent and 2 percent, respectively.

A risk management officer from a joint-stock bank theorized that the sub-prime mortgage crisis in the United States has exposed the issue in the original provision coverage policies: less provisions are required during the positive economic cycle, while more provisions are required during the negative economic cycle.

"Since the international financial crisis, the [the commission] has always stressed the countercyclical oversight and supervision," he said

According to the China International Capital Corporation, there are some shortcomings in the existing provision coverage ratio indicators. As the non-performing ratio of China's banking industry stands at a historical low level, the universally high provision coverage ratio cannot fully cover the NPLs that may possibly occur in the future.

The officer from the joint-stock bank analyzed, "Regardless of the growing provision coverage ratio and decreasing balance of provisions during the positive economic cycle, the actual hidden risk is perhaps increasingly higher."

By People's Daily Online