SHANGHAI (Nov 20): China may further ease the way it calculates banks’ loan-to-deposit ratios by including some interbank deposits, boosting financial institutions’ lending power as the economy falters.
The government will make the ratio more flexible and improve loan management, Premier Li Keqiang said yesterday at a meeting of the State Council.
As part of the shift, the central bank may add seven trillion yuan (US$1.1 trillion) of interbank deposits to the calculations, according to China International Capital Corp, which didn’t speculate on the likely timing.
Chinese policy makers are seeking to cut funding costs and feed credit into the economy as manufacturing growth weakens and economists predict the nation’s slowest expansion since 1990.
Bank of America said today that including interbank deposits had the potential to boost bank loans by 8.1 trillion yuan, though that number would likely be trimmed by the way some of the money would be classified.
China limits bank lending to no more than 75 percent of deposits.
In June, the China Banking Regulatory Commission loosened loan-to-deposit calculations through changes that related to negotiable certificates of deposit and some credit extended to small enterprises and the rural sector.
The seven-day repo rate, a gauge of funding availability on the interbank market, fell seven basis points to 3.14 percent as of 10:38am in Shanghai, according to a weighted average compiled by the National Interbank Funding Centre.
Reserve requirements
The central bank may also include 500 billion yuan of interbank loans to non-deposit taking financial institutions in the calculation, CICC’s Beijing-based analyst Huang Jie wrote in a note today.
Banks’ loan-to-deposit ratio may drop to about 60 to 61 percent from 64.2 percent at the end of September, Huang estimated.
A change in the calculations to include interbank deposits could have a side-effect: cuts in banks’ reserve requirements, according to Huang.
Extra deposits mean banks have to set aside extra reserves.
The central bank may need to cut reserve ratios two or three times to offset the impact and maintain liquidity, Huang said.
A Chinese manufacturing index fell to a six-month low this month, HSBC Holdings and Markit Economics said today.