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Bank of China, Construction Bank tighten loan rules

(Agencies)
Updated: 2009-04-16 19:19

Bank of China (BOC) and China Construction Bank (CCB), two of the country's biggest lenders, are tightening loan rules and increasing scrutiny on the use of borrowings, as explosive growth in lending fuels risk concerns.

BOC has issued guidelines to its branches to monitor borrowers and the flow of loan capital as part of efforts to limit risks while continuing to maintain rapid business growth, sources familiar with the situation said.

CCB has started to inspect consumer loans, to ensure they are used for their intended purposes and not for speculation on the stock market, two bank officials familiar with the situation said.

Related readings:  Bank loans hit record in March  China to keep relaxed monetary policy  CCB to give out 500-600b yuan in loans  BOC hit by narrowing margins

The China Banking Regulatory Commission will soon issue stricter lending guidelines to banks to ensure proper use of loans, the China Securities Journal reported on Thursday.

New rules will call for stricter enforcement of direct payment of loans to the borrower and direct repayment from the borrower, the paper said, citing a source familiar with the situation.

BOC could not be immediately reached for comment while CCB declined to comment.

New lending has soared in China, with banks extending a record 1.89 trillion yuan ($277 billion) in loans in March, up from already high levels of 1.07 trillion yuan in February and 1.62 trillion yuan, the previous monthly record, in January.

The government has urged banks to lend to support an economy that slowed to 6.1 percent during the first quarter from double-digit annual growth seen not long ago.

While the surge in lending has bolstered hopes for an early recovery in the world's third-largest economy, it has also triggered worries that much of the money may be finding its way into the stock market, and banks' asset quality might suffer in the long term.

"Banks face the contradictory tasks of supporting economic growth and controlling lending risks," said Qiu Zhicheng, analyst at Guosen Securities Co. "Explosive lending benefits banks in the short term, but bad loans may emerge eventually."

"Some companies have already seen operational or financial difficulties while relatively good firms also face increasing short- and long-term uncertainty," sources cited a BOC document as saying. "We must strengthen management of new loans, to ensure rapid and healthy development of our business."

CCB has started tracing consumer loans extended since last October to ensure they do not flow into the stock market, or else the loans will be called back, according to an official with direct knowledge of the matter.

The Chinese stock market's benchmark Shanghai Composite Index has surged nearly 40 percent this year and was the best-performing stock market among the world's large bourses in the first quarter.

Meanwhile, nearly 40 percent of new lending in January was in short-term bill financing, typically used by companies to meet immediate cash needs rather than for long-term investments, although that proportion had fallen to about 20 percent in March.