China's Banks to Get Loan Loss Provision Rule

The China Banking Regulatory Commission (CBRC) is preparing first-ever standards for lending institutions that would require a minimum 2.5 percent of loan loss provision ratios.

CBRC, which is expected to issue the new rule by the end of the year, has never before set rigid requirements for provisioning.

The regulator's move is aimed at guarding against bad loan damage follow massive bank lending in 2009 and a more moderate yet strong loan pace this year.

Caixin learned details of CBRC's plan are still being discussed. But once implemented, the new rule would put more pressure on many joint stock, city and provincial government-controlled banks but may have limited impact on major, state-owned banks.

First half financial reports for the country's largest banks showed four of five would fail to meet the proposed standard.

The loan loss provision ratio was 2.39 percent at Industrial and Commercial Bank of China, 3.15 percent at Agricultural Bank of China, 2.26 percent at Bank of China, 2.49 percent at China Construction Bank, and 1.97 percent at Bank of Communications. Only Agricultural Bank's ratio would pass muster.

Smaller banks that have recently reported low provisions include the best performers in the category, Huaxia Bank at 2.49 percent and Nanjing Bank at 2.15 percent.

Nevertheless, a source told Caixin that even banks with provision ratios above CBRC's proposed floor may have to grapple with bad loans.

"Although a bank's provision rate may be relatively high, it can't reflect the real bad debt level" due to impact of higher lending over the past two years, the source said.