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Banks Ordered to Clean up Performance
China's central bank ordered commercial banks to stop "irregular" practices in pursuit of a bigger market share in a circular issued yesterday.

"Some banks, in blind pursuit of business expansion and a greater market share, are engaged in irregular competition, which is undermining the financial order," said the People's Bank of China.

Banks should not raise interest rates on deposits or pay fees or give gifts to depositors or those handling deposits at companies, it said. They must revoke incentives that encourage employees to attract depositors to the bank and stop assigning deposit quotas to employees, it added.

Currently, commercial banks can float lending rates within a range set by the central bank but must take deposits on fixed rates.

"It (banks raising borrowing rates) is not very common," a central bank official said. "But, when there are early signs, you have to stop it."

The official said banks have been found conducting a variety of "irregular" activities, such as revealing problems with a competing bank to clients, or building barriers against each other.

Analysts say "irregular" competition is more frequent among smaller banks that have fewer clients and fewer outlets to collect deposits, although larger banks are also feeling the pressure as the majority of their excess deposits has been used to buy treasury bonds.

One employee of a major Chinese bank said: "If you don't do it, other banks will. And the deposits will be theirs."

Some insiders, however, speculate that the move was targeted at the postal savings outlets scattered across the country. "Irregular" behavior aimed at netting more deposits is rampant at such postal outlets, they say. The outlets are now heavily reliant on personal savings after a reform measure in 1998 split the postal system from the lucrative telecommunications operations.

China allows the postal system, which has a ubiquitous network throughout the country, to pool savings deposits for its economic development. The deposits are all redeposited at the central bank at a rate that has made commercial banks jealous.

"The spread of interest is very big and they (postal savings outlets) have a very strong incentive to increase deposits," an insider said. The postal system is currently the fifth-largest savings collector, with around 560 billion yuan (US$67.6 billion) in outstanding deposits at the end of October last year.

The People's Bank shut down around 1,500 unlicensed postal savings outlets in a crackdown last year, according to earlier media reports.

The capital city seems to be in better order. Guo Jun, deputy secretary-general of the Beijing Banking Association, said: "Such practices (irregularities at banks) may exist but we don't find it a problem here."

(China Daily November 29, 2002)


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