China Gives Foreign Banks Five Years to Comply With Loan-Deposit Ratio

China will give locally incorporated foreign banks five years to abide by a rule requiring them to keep loans in the local currency below 75 percent of deposits, state media said Thursday.
The rule, which has been sent out to foreign lenders for comment, is likely to be officially released by the end of November, the China Daily reported, citing unnamed sources.

China announced last week new regulations governing foreign banks' operations in the country, as part of its World Trade Organization commitments to open up the banking sector to global competition.

The rules, which will take effect on December 11 -- the fifth anniversary of China's entry into the WTO -- place some tough restrictions on the banks as they seek to tap more than two trillion dollars in household deposits.

The proposed amendment to the published regulations comes after criticism from foreign banks saying the loan-to-deposit ratio could "greatly disrupt" their business, according to the paper.

"The criteria could be a tough request for foreign lenders if the regulator does not give them a five-year grace period," an unidentified banking executive told the paper.

While foreign banks expanded their lending business in the local currency, especially with multinational clients, restricted branch networks have limited their ability to collect deposits.

It cited statistics showing foreign financial institutions in China had collected 114 billion yuan (14.3 billion dollars) in deposits by the end of August, while 161 billion yuan was paid out in loans.

Currently, foreign lenders are only allowed to carry out yuan-dominated business with Chinese companies, not individuals, and only in 25 cities. Banks can also offer foreign currency loans.

The amended rules also give a three-year grace period before foreign banks are prevented from lending over 10 percent of their capital to a single client, according to the paper.

"The money a locally incorporated foreign bank lends to a single client cannot exceed 10 percent of its overall capital after December 1, 2009," the new rule said.

"Before that, foreign banks cannot lend over 25 per cent of their capital to a single client," it said.

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