China tightens bank lending rules

BEIJING: Banking regulators in China have ordered institutions to tighten controls on risk and carefully scrutinize borrowers' ability to pay their debts in a new step to rein in lending.

The government's order comes as Beijing tries to prevent excessive lending that it says could lead to financial problems while ensuring adequate credit to keep the economic recovery on track.

Chinese leaders worry that a stimulus-driven torrent of lending is fueling a dangerous bubble in stock and real estate prices. Beijing has ordered banks to set aside additional reserves and to keep lending stable, but the central bank has avoided raising interest rates, which might slow down growth.

The China Banking Regulatory Commission, or CBRC, said in a statement on its Web site Saturday that it issued two regulations to increase risk management on personal and working capital loans. The rules took effect Feb. 12.

The regulation on working capital loans stated that banks must calculate borrowers' actual needs and also consider their cash flow, liabilities, repayment abilities and other factors when assessing loan applications.

On personal lending, the regulation says that borrowers may not obtain loans if they do not specify what the money is to be used for.

Chinese leaders have warned banks repeatedly to keep lending stable in 2010 and avoid financing unneeded real estate and industrial projects due to fears they might fuel inflation or leave banks burdened with bad debts if poorly planned projects fail.

Banks were ordered Feb. 12 to increase reserves by half a percentage point — to 16.5 percent for large lenders and to 14.5 percent for smaller institutions.

The government reported earlier this month that January bank lending rocketed to 1.4 trillion yuan ($200 billion) — nearly one-fifth of the planned 2010 total. That was despite a Jan. 12 order to banks to raise reserves, also by 0.5 percent, and repeated commands to keep lending at sensible levels.

Banks are expected to scale back lending to roughly 7.5 trillion yuan ($1.1 trillion) this year, after handing out some 9.5 trillion yuan ($1.4 trillion) last year, the industry's top regulator, Liu Mingkang, said last month.