The Chinese government is planning to repeal its loan-deposit ratio regulation next month. At present, the loan limit is set at 75 percent of bank deposits. Despite the deregulation, the profitability of Korean banks in China is likely to deteriorate in the short term, because the local demand for loans is still low, and the interest rate of high-yield trusts, which have been their cash cow, is likely to decline.
On June 24, the State Council of China passed the revision of the Commercial Bank Act based on its determination that the loan-deposit ratio regulation, which was drawn up to maintain the soundness of banks, failed to fulfill its role due to the diversification of financial structures. According to the revision, the regulation is replaced with liquidity coverage and net safe funding ratios. Experts point out that this measure, which is equivalent to a 1.5 percentage point cut in the deposit reserve ratio, will result in the supply of more liquidity to small and medium enterprises.
Korean banks in China are in favor of the policy, but are concerned about some deterioration in short-term profitability. Up until now, they have maintained a loan-deposit ratio of 67 percent, as the deposits have been withdrawn with frequency, whereas the loans have reached maturity in most cases. “Although the Chinese government removed the regulation, the expansion in our lending capacity is limited to about 8 percent, because the 75 percent rule is to be in use as an index to refer to,” one of them explained.
The increase in lending capacity is less likely to bring greater profits. The Korean banks’ business in China has focused on Korean companies in the country, which means the banks are expected to continue to have a hard time finding those that will borrow their money. “A relaxation of the single borrower loan limit seems to be more urgent than the measure,” it added.