The China Banking Regulatory Commission (CBRC) could reduce the risk weighting of small enterprise loans to banks in an effort to stimulate such lending, believes Barclays Capital.
The UK bank cited a June 5 report from China Securities News, which stated that the risk weighting for business loans of up to Rmb5 million (US$771,772) could drop from its current 100% to as low as 50%.
Small loans funded by financial bonds—the implementation of which has not yet been specified—will also not contribute to banks’ loan deposit ratios (LDR). That step is explicitly intended to encourage banks to lend to small-to-medium enterprises (SMEs).
Exempting small loans is a notable step considering Beijing’s increasingly tough stance towards lending in general. The country’s authorities insist that banks maintain an LDR of at least 75%, a level that it plans to enforce on a daily basis, according to a Reuters report citing unnamed traders and state media. Previously it enforced the ratio on a monthly basis.
While Beijing is implementing draconian monetary tightening measures in an effort to half inflation and potential asset bubbles, it does not want to impact the development of SMEs.
“The CBRC has given the banks guidance that they’re supposed to grow SME loans faster than average loan growth [has been] these past two years going forward,” said BarCap analyst May Yan.
BarCap believes that the notice is generally positive for China’s banks, particularly China Minsheng Bank, which is heavily engaged in smaller loans. Fifteen percent of its total loans were at around Rmb1 million at the end of 2010, according to BarCap. The UK bank also believes that the move is positive for banks’ capital adequacy ratios.
But the reforms may not come immediately and take some time to be implemented, especially with no official indication about the drop in the risk rating of such loans, said another China banks analyst who declined to be named.
“The CBRC might eventually allow a lower risk rating from 100% to 75% but right now it's not there yet,” said the analyst. “[The banks] received guidance to promote and increase SME lending but there's nothing that tells them they can drop the risk rating yet.”