China's top legislature yesterday backed a legal amendment that will allow the country's banking supervisory bodies to investigate non-financial institutions and individuals connected with financial institutions.

The draft amendment to the banking regulation and supervision law was passed yesterday by the Standing Committee of the 10th National People's Congress.

The amendment is designed to further enhance supervision of the banking sector in the face of rising foreign competition when the sector is fully opened at the end of this year.

The current banking supervision law, which came into force in February 2004, clarified the legal status of the China Banking Regulatory Commission (CBRC). It has played an active role in regulating supervisory activities, preventing risks in the banking sector and protecting the legal rights of depositors and banking institutions' clients.

However, it only allows for the monitoring, investigation and acquisition of information from financial institutions.

According to the CBRC Chairman Liu Mingkang, it is not possible for banking watchdogs to conduct effective supervision under the current law.

Increasing numbers of illegal practices are taking place in the banking sector as a result of further innovation and the development of e-banking.

There were a total of 461 cases involving sums of more than 1 million yuan (US$126,582) in 2005, with these worth a total of 7.7 billion yuan (US$974 million).

In addition, many illegal practices are committed by bank insiders in collusion with people outside the industry, which the CBRC has no legal right to investigate.

Liu said that the CBRC last year received 76 complaints from its subsidiaries, saying their investigations involving some 100 cases were hindered.

"With the right to investigate non-financial institutions and individuals, banking supervisory bodies will be better equipped to fulfil their supervisory duties, and promptly discover illegal practices in the banking sector, to avoid or minimize losses for banks and their clients," said Zhao Xijun, a financial professor at Renmin University of China.

China has so far not established a sound credit system, said Zhao, adding that banking institutions still need to improve their capabilities in terms of risk control and corporate governance.

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