Bad loan provision key to reform
(China Daily)
Updated: 2005-05-25 09:02

A top Chinese central banker pledged yesterday to accelerate reform of banks' bad loan provision system, which he said is key to the success of the widely-anticipated rehabilitation of financial institutions.

"During this round of reform, it's important to pay more attention to and accelerate the reform of the provision system," Zhou Xiaochuan, governor of the People's Bank of China, told the China Economic Summit yesterday.

The establishment of a sound provision system, under which commercial banks set aside part of their profits for possible write-offs of bad loans and other types of asset depreciation, is essential to improving ability to absorb bad loans in the future, he said.

By establishing the new system, the authorities are demonstrating they are listening to potential investors in banks to "show the government's resolve to provide a sound financial environment," Zhou told the summit, which is part of the Eighth Beijing International High-tech Exposition.

China is pressing ahead joint-stock reform of the four dominant State-owned commercial banks. Three of them - the Bank of China, the China Construction Bank and the Industrial and Commercial Bank of China - have received recapitalizations in preparation for initial public offerings on overseas markets.

The provision system plays an important role in shaping the banks' financial results, which are key to their success in the capital market. A greater provision will mean less profits on their financial statements.

But details of the system, such as what assets need provisions, are still to be worked out, Zhou said, adding that international accounting and auditing rules will be considered to boost investor confidence.

Chinese banks are given a grace period before they are required to meet provision requirements set by banking regulators. Still, many banks, particularly the ones with a longer operational history, are wiping out a large portion of their profits to write-off bad loans.

Although the ICBC chalked up a combined 190 billion yuan (US$22.9 billion) profit from 2000 to the first half of 2004, nearly 90 per cent covered risk provisions and write-offs.

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