January 29, 2013 / 3:57 AM / 5 years ago

China may fine-tune loan-to-deposit ratio rule - paper

BEIJING, Jan 29 (Reuters) - China's bank watchdog may fine-tune loan-to-deposit ratio rules to improve lenders' risk controls as interest rates are gradually liberalised, a local newspaper reported on Tuesday.

A China Business News report said the China Banking Regulatory Commission Chairman Shang Fulin told a recent internal meeting that extensive research would be carried out on current rules on loan-to-deposit ratios and the methodology would be enhanced.

The report did not specify how the regulator would reform the ratio, which many bankers say should be raised, or if it would simply be replaced with a new measurement tool.

Lenders face mounting pressure in competing for deposits as they move towards a more market-based interest rate regime.

Chinese banks' loan to deposit ratio (LDR) is now capped at 75 percent and designed to tie lending closely to the level of deposits, providing a stable source of capital for credit creation and reducing bank exposure to short-term funding and leverage risks.

Too tight a cap constrains the ability of banks to lend, a particular problem in China where most enterprises still rely heavily on bank lending to finance businesses and investment.

The newspaper said the average loan-to-deposit ratio of the banking sector was 64 percent at the end of 2012.

Economists also say China should raise the loan-to-deposit ratio to enable banks to lend more and support growth, and avoid a crunch at the end of each quarter when banks suck in deposits to meet regulatory requirements for loans already extended.

Chinese banks have slowed the pace of extending loans over the past months, partially because of a surge in alternative funding channels, especially in trust loans and corporate bonds.

Chinese banks issued a total of 8.2 trillion yuan ($1.32 trillion)in local currency loans in 2012 and the figure is expected to reach 8.5 trillion yuan this year.

$1 = 6.2226 Chinese yuan Reporting by Aileen Wang and Nick Edwards; Editing by Jacqueline Wong

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