As it aims to bolster methods of market exit and risk disposal for institutions that loan money, the central bank of China introduced a draft of updates to legislation applicable to commercial banks, Reuters reported.
Runs on small financial institutions (FIs) in China have been on the uptick as of last year. In May 2019, the government took over Baoshang Bank in the first seizure of its kind in almost 20 years.
The People’s Bank of China (PBOC) set the terms for commercial banks to seek bankruptcy, while outlining actions for lenders to follow as they aim to leave the market or reorganize through its first changes to the law as of 2015.
The changes also put forward a process for banks to assuage risks. Steps include mergers and acquisitions in addition to risk notification.
China’s FIs, for their part, are not immune to the recession brought about by the coronavirus. Its banks have been heavily impacted as loans have gone sour. In August, news surfaced that five of the country’s biggest state-owned lenders saw their largest profit losses in at least 10 years, as defaulted debt has jumped amid the coronavirus.
The Bank of Communications, Bank of China, Agricultural Bank of China, China Construction Bank and Industrial and Commercial Bank of China registered a minimum of 10 percent year-on-year declines from January to June. During the first two quarters of 2020, these lenders also put more funds aside in anticipation of loan losses to come.
Furthermore, the Beijing government has requested that banks forfeit 1.5 trillion yuan ($219 billion) in profit by cutting lending rates and deferring loan repayments in an effort to assist firms.
“The banks have been asked to perform [a] national service,” CreditSights Research Analyst Jason Tan told Squawk Box Asia on (Aug. 31). “They’ve been asked to support the economy at the expense of their own operational strength.”