The China Banking Regulatory Commission headquarters in Beijing. [Photo / China Daily]

CBRC preparesinstructions for banks to inspect the health of their lending practices

BEIJING - The China Banking Regulatory Commission (CBRC) will require banks to examine their guarantee business throughout July to prevent the risky practices of some guarantee companies from spreading to commercial lenders, said the banking watchdog on Wednesday.

It is also planning to start spot inspections of banks in the coming months to avoid risks associated with financing guarantee companies, said Zhu Yongyang, deputy director-general of the financing guarantee department at the CBRC.

He said a document has already been drafted to bar bank staff members and people who have close ties to them from setting up or assigning specific guarantee companies for the bank's business.

Concerns over guarantee companies have been rising since some of the companies sought to profit by offering loans with interest rates higher than 50 percent, while bank credit was tightened to curb inflation and enterprises were thirsty for capital to maintain operation.

In coastal city Xiamen, Fujian province, local media reported that in two months' time the practice got three guarantee companies trapped in non-performing loans ranging from 300 million yuan ($46 million) to 3 billion yuan.

It is illegal for guarantee companies to lend directly to debtors instead of through banks, and this should be carefully monitored and punished, said Zhu.

The fees charged for guarantees stayed below normal levels.

Usually, the rate for financing guarantees stand at 50 percent of banks' lending interest rates, he said. "In 2010, guarantee rates were on average 2.2 percent of lending interest rates."

Another document to help the industry grow healthier will come out within this month to encourage private capital to play a bigger role in helping small and medium-sized enterprises (SMEs), said Zhu.

"The overly scattered industry should be consolidated and the scale of the companies needs further expansion."

By the end of 2010, there were 6,030 financing guarantee institutions across the country, of which 23.7 percent were controlled by private capital and 76.3 percent were held by foreign capital. Outstanding guarantees amounted to 1.15 trillion yuan, up by 64.6 percent year-on-year, with a loss ratio of 0.04 percent.

Guarantees for loans to SMEs went up by 69.9 percent year-on-year to 689.4 billion yuan by the end of 2010, said the CBRC.

"Under the background of macro-monetary tightening, the financing guarantee industry will probably shrink this year, and they are more likely to pursue business with high revenue as well as high risks, which may increase the uncertainty of liquidity," said Zhu, warning governments at the local level to watch closely for risky loans.

"Currently the risks lying in guarantee companies will not pose systematic threats to banks, as long as the lenders choose legal guarantee companies," said Guo Tianyong, director of the research center of the Chinese banking industry at the Central University of Finance and Economics.

Related readings:  China raises bank reserves to contain inflation  Money growth slows in May  CBRC to revise capital adequacy rules

The People's Bank of China, the country's central bank, vowed on Tuesday that it will actively prevent and resolve lenders' risks associated with non-deposit financial institutions, financing guarantee companies, pawn shops, and private financing behaviors, according to a report published on its official website.

By the end of 2010, the number of lenders that cooperated with financing guarantee companies rose by 27.1 percent year-on-year to 10,321, according to statistics from CBRC.

It will also increase supervision over trust and investment, leasing, finance companies and other non-deposit financial institutions to consolidate basis for banks' stable operations, said the central bank.

"In 2011, the operating environment of banking sector still faces great uncertainties," it said, highlighting the risks related to loans to local governments through financing vehicles and property industry.