The "Interlinking Policy" on Credit Controls

Still, higher CAR requirements don't have to be an arduous challenge for banks. A source close to the shareholding organization of a large state-owned commercial bank said that in terms of the added risk that loan issuance has placed on capital, banks hold the highest proportion. Therefore, if banks can improve the quality of their lending, the positive influence on CAR would be significant.

An Ace in the Hole

Aimed at reducing inherent credit risk, regulatory departments recently brought out yet another "ace in the hole," deciding to test the issuance compliance of fixed asset loans for loans issued in the first half of January and find out whether or not banks have adopted the method of lender entrusted payment. Local banking regulators throughout the country will begin on-site investigations based on the "Tentative Measures for the Administration of Loans for Fixed Assets" that became effective beginning October 2009.

Lender entrusted payment refers to a kind of loan payment method where the lender transfers the loan proceeds directly to the ultimate payee. This method can reduce the risk of the borrower using the loan for a purpose other than what it was originally intended for.   

The above-mentioned regulations clearly stipulate that a fixed asset loan whose amount exceeds the total investment of the project by more than five percent or is over five million yuan is required to utilize the method of entrusted payment. 
    
Both regulatory and bank officials have stated that while these measures have the potential to bring about fundamental change in the industry, because they will challenge certain vested interests, the measures will be met with significant resistance.

Regulatory authorities discovered during a 2009 investigation that many enterprises divert bank loan funds to act as letters of credit or down payments for bank acceptance bills. Furthermore, along with the steady recovery of both the stock market and the real estate market, instances of credit capital violating regulations for use and flowing into real estate and stocks have begun to increase.

A source from a regulatory agency stated that the "Tentative Measures for the Administration of Loans for Fixed Assets" are in fact not a short-term policy action. However, a senior official from a large bank spoke bluntly saying that the implementation of the new regulations would likely cause shocks throughout the industry over the short-term. 

Still, a high level official from a state-owned bank stated that under the loose credit environment some borrowers already have the upper hand during negotiations.  Whether or they can accept this requirement and how to best regulate improper lending practices are the biggest challenges facing the new policy regulations. 

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