The number of private banks approved for business in China has nearly doubled over the past six months, yet industry insiders expect regulators to keep a tight leash on the sector due to risk concerns.
Official data indicates that during the period from 21 May to 21 November seven private banks obtained approval for operation from Chinese authorities, bringing the nationwide total to 17.
These new private lenders include Xin’an Bank, Liaoning Zhenxing Bank, Hangzhou Keshang Bank, Jiangsu Suning Bank, Beijing Zhongguancun Bank, Weihai Lanhai Bank and Yilian Bank.
While the past half year marks a sizeable percentage increase in the number of private banks approved for business in China, industry sources said to Economic Information Daily that regulators are keeping a tight leash on the sector and maintaining strict thresholds for entry.
2014 marked the official launch of trials for the full private ownership of lending institutions by the China Banking Regulatory Commission (CBRC), with a total of five bank obtaining approval for business by the end of the first half of 2015.
CBRC issued the “Guidance Opinions Concerning Expediting the Development of Private Banks” (关于促进民营银行发展的指导意见) on 26 June 2015, and the “Guidance Opinions Concerning Regulation of Private Banks” (关于民营银行监管的指导意见) on 31 December 2016.
Permitting private ownership of lending institutions is considered a key part of China’s financial reform program, given the commanding role of banks in the country’s finance sector as well as the long-standing dominance of state-owned incumbents.
Beijing reportedly hopes that the new privately owned banks will be better positioned than the big-state owned lenders to service small and medium-sized enterprises and other borrowers who often find it difficult to obtain financing, given the priority access granted to state-owned enterprises.
Shenzhen-based WeBank, for example, has provided a 44 million “particle loans” (微粒贷”) over the past two years with an average value of just 8,200 yuan, for total lending of 360 billion yuan.
CBRC nonetheless continues to maintain strict entry conditions, requiring that private enterprises investing in the equity of banking sector finance institutions post continuous profits over the past three accounting years, net assets in excess of 30% total assets following end of year dividends, and an equity investment balance of no more than 50% of net assets.
While CBRC has not stipulated any minimum registered capital requirements, in practice local authorities have exercised considerable stringency in this area.
Shanxi and Shaanxi province, for example, have required minimum registered capital of 200 million yuan for private banks, with Shanxi’s banking regulator mandating that sponsors be private enterprises registered within the province that hold no more than 30% of total equity in lenders.
According to industry insiders these registered capital requirements are a key means of controlling risk, while ceilings on equity holdings by private enterprises are for the purpose of preventing large-scale shareholders from using lenders as their own “ATM machines.”
During the three years since trials were launched the opening cohort of five private banks have posted improving performances following some initial struggles. All five saw sizeable revenue and net profit gains in 2016, while their non-performing loan rates are low overall, with two banks claiming NPL’s of zero.
Given that Beijing opened the door to privately owned banks in China as part of efforts to shore up financial inclusion, experts say regulators should push for greater specialisation and differentiation of these institutions with a focus on smaller scale-lending and micro-loans.
Dong Ximiao, (董希淼), a senior researcher with the Chongyang Institute of Financial Studies at Renmin University, said in a recent report that this differentiation of private banks requires the support and encouragement of regulators.
“Under the precondition of effective risk prevention, the next step is proposing that banking regulators drive and continuously improve differentiated regulatory measures, such as the implementation and refinement of differentiated NPL tolerance policies, the separate assessment of non-performing micro-loans, tax exemption policies for interest revenues from micro-loans, and encouraging private banks to focus on servicing micro-enterprises,” said Dong.
