The China Banking Regulatory Commission (CBRC), established earlier this year, is flexing its muscles. It has started an ambitious programme to set up branch offices in every province and province level city. China specialists say this is necessary, as excessive local influence still persists, despite reforming the previous provincial hierarchy into a broader regional hierarchy.
The CBRC has not yet written a formal report on its findings, garnered by specially trained investigators who make visits to sift through the data collected in the bank branches.
But preliminary feedback confirms what many have long suspected.
Chinese banks like to make mid to long term loans to a very narrow range of industries and companies CBRC officials tell FinanceAsia.
That, say outside observers, shows that the big four state banks, Bank of China, ICBC, Agricultural Bank and Construction are facing a dangerous concentration of loans. It also shows that the private sector is still not getting sufficient attention from the banking sector, despite half-hearted urging by the government.
"The banks find it difficult to differentiate between customers, partly because good credit information is hard to come by," says one CBRC staffer. "So you have the banks getting into a frenzy to lend to a select, preferably government-backed customers."
'Large' is the characteristic of the Big Four loans, he points out: large loans go to large enterprises, major city governments, large infrastructure projects and most recently, city government level property projects. The problem with the banks all chasing a limited number of clients is that careful scrutiny of borrowers gets neglected, as do follow-up investigations to confirm the borrower is still in a position to pay back his loans.
Other point out that such lending also has a macro impact.
"A manifestation of this kind of excessive lending to a handful of industries is over-investment," says one domestic investment banker. That's what happened in the TV and home appliance markets in the 1990s, dragging profits down and contributing to deflation."
In addition the banker argues, excessively easy money can lead to excessively low return rates. Such projects then become unviable when the system is affected by an external shock and money tightens up. This is what happened to Hong Kong and the South East Asian countries during the Asian financial crisis.
The Shanghai branch of the CBRC recently allowed journalists to see figures that confirm the concentrated risk profile of the banks.
By the end of 2002, 5% of enterprises in Shanghai had over 60% of the Rmb 600 billion ($72 billion) in outstanding bank loans. The top 1,300 enterprises had loans of at least Rmb 100 million ($12 million) or more each. The top 100 enterprises together had loans over Rmb 250 billion, or around 25% of the total.
And figures for nearby Ningbo city show an even greater degree of concentration, with 0.3% of companies accounting for 40% of all outstanding loans.
While infrastructure projects of all colours are popular targets for bank lending, it is no surprise that property has also become a favoured area - troublingly for a central government seeking to slow growth in the housing market. According to one study for the distribution of loans in Shanghai by the city government, 17% of new bank loans made up until June this year went to the property sector and 28% of loans went to government-related projects.
Interestingly, and apparently signaling a positive development for the banking sector, consumer loans are also rapidly beginning to make a difference to the balance of loan composition. In Shanghai, personal loans for the six months up to June saw strong growth, totaling Rmb 27 billion more than the same period last year.
System-wide, bank loans comprise 10% of total lending according to the central bank, up from 5% two years ago.
Regulators and bankers from the Big Four have repeatedly claimed the new consumer loans are much safer than traditional lending, with under 1% of new loans turning non-performing. However, this claim is being disputed.
One banker said that Bank of Shanghai only provides car loans now if they are guaranteed by insurance companies. But insurance companies are now refusing to underwrite them because default rates are so high.
Another banker says that one of the big four state banks is seeing 3% default rates on all its car loans for un-guaranteed loans.
The figure would be 5% were it not for guarantees by insurance companies, well above the stated rate.
The banker says that the effect of defaulting car loans on the nascent insurance industry also needs to be looked at.
According to the Commercial Banking Law, banks are restricted to lending no more than 15% of the registered capital of a customer. But observers point out that most enterprises have numerous credit lines.
Such a rule therefore serves little purpose in diminishing the access of enterprises to easy credit, despite attempts by the central banks to establish a system enabling banks to be kept informed of each others' lending to a company.