Beijing to Reduce Provision Coverage Ratio, Increase Prominence of Financial Inclusion During Bank Assessments

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China’s State Council has just launched two more measures to facilitate the flow of funds to Chinese small businesses, following the implementation of a bevy of measures to support the real economy following the spread of the COVID-19 pandemic.

A regular meeting of China’s State Council held on 21 April two measures for improving financial inclusion and lending to smaller business, including:

  1. An increase in the weighting of financial inclusion in regulatory assessments of banking-sector institutions, and,
  2. A reduction in the provision coverage ratio for small and medium-sized lenders.

The weighting of the financial inclusion of the branch banks of banking sector financial institutions will rise to 10% during integrated performance assessments, in a bid to encourage small and micro-loans.

The reserve coverage ratio as required by Chinese regulators will be reduced by 20 basis points, in order to unleash more funds for micro and small-enterprises.

Prior to the the reserve coverage ratio required of Chinese banks was between 120 – 150%, with the reduction meaning that some small and medium-sized banks could see this figure drop to as low as 100%.

The State Council hopes that the move will “expedite and strengthen financial services for micro and small-enterprises.”

“These two measures are a concrete implementation of the spirit of the Politburo meeting on 17 April,” said Tang Jianwei (唐建伟), a researcher from the Bank of Communications Financial Research Centre.

“Increasing the assessment weighting will spur the branches of commercial banks to be more active in financial inclusion operations.

“Small and medium-sized banks are a mainstay force for supporting micro and small-enterprises, and adjustment to the provision coverage ratio will increase service capability.”

Since the start of the year Chinese central government has adopted a slew of financial measures to mitigate the impacts of the COVID-19 pandemic on the domestic economy.

These have included sizeable reductions to rates for open market instruments, and a 1 percentage point targeted reduction to the required reserve ratio (RRR) for smaller banks, scheduled for two-stage implementation on 15 April and 15 May.

On 7 April PBOC also reduced the in­ter­est rate for ex­cess re­serves de­posited with it from 0.72% to 0.35%, for the first such re­duc­tion in 12 years since 2008. 

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