For every dollar a bank collects in deposits, it can lend only 75 cents.
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In a bid to revive its faltering economy, China is planning to remove the loan-to-deposit cap for commercial banks that stands at 75% of their deposits presently.
China will scrap the country’s longstanding loan-to-deposit ratio requirement, the latest in a series of measures to reform the country’s commercial banking sector and get more lending into a slowing economy.
The move follows a decision in May to launch deposit insurance for bank customers as a stepping stone towards a full liberalisation of interest rates.
Wednesday’s draft amendment will be submitted for approval to the Standing Committee of the National People’s Congress, China’s parliament, the cabinet said, without giving a timetable.
Premier Li Keqiang is trying to reshape a State-run banking industry that has $29 trillion of assets, nearly twice the amount of its United States counterpart.
Hu described the reserve ratio and the loan ratio as “the two most outdated and distorted regulatory measures in China’s financial system”.
China has kept the 75-percent ratio unchanged for years.
ANZ economists Liu Ligang and Raymond Yeung said in a research note Thursday: “Since commercial banks will be allowed to lend more from their deposit base, the change can help lower cost of borrowing and improve monetary policy transmission mechanism”.
Removal of the cap will be good for bank earnings and valuations, easing competition for deposits, according to Sanford C. Bernstein & Co analysts led by Hou Wei.
While the loan-to-deposit level for the industry was 66 per cent in March, and the China Banking Regulatory Commission eased the requirement past year by changing the method of calculation, it has remained a constraint for some listed lenders.
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Industrial and Commercial Bank of China, the world’s largest lender by assets, rose for a third day in over-the- counter trading in New York. That should actually make the banks safer, even while modestly boosting lending.
