Regulator shuts down backdoor loans

08:35, July 07, 2010      

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The banking regulator has clamped down on sketchy lending practices that allowed banks to ignore loan limits and fund risky ventures, the Bank of Beijing confirmed Tuesday.

"We've gotten an oral notification (on this)," Yan Xiaoyan, president of Bank of Beijing (BOB), told the Global Times, confirming previously unverified media reports.

According to the reports, the China Banking Regulatory Commission suddenly halted use of bank-trust wealth management products Friday afternoon.

The bank-trust products let banks use trust funds to give out loans primarily to local governments through backdoor procedures which keep the money off the banks' books. Through this process, the banks not only get to skirt the government's regulations limiting loan outflows, but they also throw all risk of bank-trust product default onto the investors' shoulders.

The lending quota for 2010 is set at 7.5 trillion yuan ($1.11 trillion), down a quarter from last year's total. But while official lending has dropped, the backdoor bank-trust numbers have been on the rise.

The sales value of bank-trust products in the first six months amounted to 2.8 trillion yuan ($412.98 billion), far more than the 1.77 trillion yuan ($261.06 billion) sold in all of last year.

That jump drew the attention of the regulator, the Securities Times reported Tuesday.

This suspension is aimed to curb the deformed lending through bank-trust products, said Hu Yaokun, financing &banking partner of Adfaith Management Consulting.

The tightening control on mortgages and local government lending led to deficient cash flow of property developers and local government financing vehicles (LGFVs), which have stretched hard to get new lending by alternatively less controlled ways such as bank-trust offerings, Hu said.

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