Regional Banks Penalised for Excessive Loan Concentration, Use as “ATM’s” by Top Shareholders


Smaller-size regional banks in China have come under scrutiny for the excessive concentration of lending towards certain borrowers, as well as claims that key shareholders are flouting equity restrictions to use lenders as their own “ATM’s.”

According to a report from Diyi Caijing at certain smaller Chinese banks the loan concentration ratio for their single largest borrower is in excess of 60%, while at others lending to the ten largest single clients or group clients is equal to between 90% to 130% of net capital.

The “loan concentration ratio” (贷款集中度) as used in China refers to loans as a share of bank net capital, with the regulatory ceiling for single clients and group clients being ratios of 10% and 15% respectively.

While they have refrained from providing specific details, Chinese regulators say they have cracked down on excessive loan concentration over the past two months, punishing a slew of rural county banks, rural commercial banks and municipal commercial banks in the provinces of Guangxi, Hebei, Inner Mongolia and Anhui since April this year.

At one municipal commercial bank in Liaoning province the largest borrower’s loan balance was 66% of the bank’s net capital, exceeding the regulatory ceiling of 10% by 56 percentage points.

On 6 May a rural county bank in Inner Mongolia was fined 300,000 yuan for excessive loan concentration to a single borrower, while the Hebei province banking regulator announced on 7 May that it had fined a rural credit society in Baoding municipality 500,000 yuan for loan concentration to a single borrower in excess of its ceiling of 10%.

An executive from the lender was issued with a warning, as well as had his professional qualifications suspended for a period of two years.

On 4 and 6 June the Guangxi province banking regulator announced the issuance of 22 administrative penalties, most of which involved banks extending excessive credit to group clients without adequately taking risk factors into consideration.

The punishments included fines of 200,000 for municipal commercial banks in two of the province’s biggest cities – Bank of Liuzhou and Bank of Guilin.

As of the end of 2018 the loan concentration ratio of Bank of Liuzhou’s largest singe client was 11.75%, while that for its largest group client was 23.79%, exceeding the regulatory ceiling by 1.75 percentage points and 8.79 percentage points respectively.

For the same period Bank of Dandong’s loans to its single largest borrower – Dandong Port Group Co., Ltd. (丹东港集团有限公司), accounted for 10.78% of all loans and 66% of net capital.

Regional banks in China are also coming under scrutiny over ownership by certain investors in excess of equity restrictions, leading to the potential for their misuse as “ATM’s” by top shareholders via affiliate transactions exacerbate risk.

At the end of April the China Banking and Insurance Regulatory (CBIRC) issued a notice highlighting the problem of some shareholders raising capital in breach of regulations; forging investment qualifications, or engaging in proxy shareholding.

In some cases shareholding groups have breached the equity restrictions via the use of affiliates to make investments, with the Guangxi regulator fining a municipal commercial bank 450,000 yuan on 6 June for accepting investment from a shareholder whose funding sources were not adequately disclosed.

“Once they come under control of major shareholders, banks change so that they service the major shareholder, as opposed to service the interests of all shareholders,” said once source from a municipal commercial lender to Diyi Caijing.

The China Banking and Insurance Regulatory Commission (CBIRC) recently announced that it would push regional lenders to further improve corporate governance systems, following the take over of Inner Mongolia’s beleaguered Baoshang Bank due to concerns of a potential bank run.