China removes regulation on loan-to-deposit ratio

China's top legislature on Saturday adopted an amendment to the Law on Commercial Banks, removing a 75-percent loan-to-deposit ratio stipulation.

The ratio will instead be regarded as a liquidity-monitoring indicator, according to the amendment, which was voted in by the National People's Congress Standing Committee at the end of a bimonthly legislative session that started on Monday.

China has kept the 75-percent ratio since the law was enacted and put into effect in 1995.

The amendment will take effect on Oct. 1.

"The ratio was set to prevent overquick expansion of commercial banks' credit scale and control liquidity risk, but it has become improper for current needs," said Shang Fulin, chairman of the China Banking Regulatory Commission.

The asset-liability structure of commercial banks has been diversified from 20 years ago, as deposits take lower ratio of liabilities and bonds investment takes more of assets.

Commercial banks had to try every means to attract more deposits so that their loans can be increased. But such outdated ratio is now hindering the already market-oriented banks to better support the real economy, Shang said.

"It's necessary and rational to remove the ratio now, good for banking reform and economic growth," said Zeng Gang, researcher at the Chinese Academy of Social Sciences.

He said such measures will generate more free space for future economic rebound with stronger credit demand.

Analysts believe the amount of credit to be released will be decided by the market, estimating no credit surge in short term while considering the weakening investment and financing demand.

Guo Tianyong, a professor at Central University of Finance and Economics, said the move will benefit small and medium-sized banks of which the ratio was much closer to the red line, so as to enhance their credit supports for agricultural development and small businesses.

Responding to concerns about the move weakening risk control, Shang said the improving supervision system has more effective indicators to monitor the liquidity risk of commercial banks.