China widens definition of loan-to-deposit ratio

[SHANGHAI] China's central bank has changed the way it calculates banks' loan-to-deposit ratios by including interbank deposits and lending for the first time, the Shanghai Securities News reported.

Savings that banks hold for non-banking financial institutions will be classified as deposits under a notice issued by the central bank today, the newspaper said, citing Sheng Songcheng, head of the People's Bank of China's statistics department. Money advanced by banks to those institutions, which include financial leasing firms, will be counted as loans, according to the report.

Banks can't lend more than 75 per cent of deposits and widening the parameters of that ratio may have given some firms scope to extend more credit, boosting government efforts to bolster the economy. The inclusion of loans by non-bank institutions surprised analysts from GF Securities Co and Bank of Communications Co as it curbs the benefits derived from the wider definition of deposits.

"The market was expecting an expansion of the deposit base only," Mu Hua, a Guangzhou-based analyst at GF Securities, said by phone on Thursday. "The impact is limited with the inclusion of interbank lending in the calculation and for some banks it could be even negative." Banking shares gained today as the Shanghai Composite Index increased 3.5 per cent. Industrial & Commercial Bank of China Ltd. closed 4.1 per cent higher, while Bank of China Ltd. climbed 6.1 per cent.

Flexible Ratio Speculation that the PBOC will ease its loan-to-deposit calculation rose after Premier Li Keqiang said Nov 19 at a State Council meeting that the government will make the ratio more flexible and improve loan management.

Two phone calls today to the central bank's press officer weren't answered.

The potential changes in the ratio could see an extra 8.6 trillion yuan (US$1.4 trillion) of funds classified as deposits by the end of November, E Yongjian, a Shanghai-based economist at Bank of Communications, said today, adding he's awaiting more details from the PBOC to work out the increased loan base.

The government will temporarily waive a requirement for banks to set aside reserves for the additional deposits included as part of the change, people with knowledge of the matter said last month.

Widening the parameters of the loan-to-deposit ratio is part of policy makers' efforts to support growth without unleashing a broad stimulus program.

The banking regulator said last year it was seeking to revise the nation's commercial banking law by removing the loan- to-deposit ratio requirement. Critics of the measure have said it exacerbates the volatility of deposits.

The ratio and a quota on lending have undermined the authority of banks in managing their own assets and liabilities, and led to distortions in the market as some banks use illegal means to obtain deposits, Wu Xiaoling, a former PBOC deputy governor, said in September 2013.

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