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Lenders under pressure from savers, central-bank regulators
By Wen Xiu and Feng Zhe
14 February 2011
Choosy savers and cautious monetary-policy makers are pressuring Chinese bankers, forcing them to adjust to a new and much drier liquidity landscape.
For many banks, a slow-motion evaporation of cash liquidity has been building since last year and intensified in January. One reason for the latest jolt was a flattening for what had been a steady uptick in savings-deposit levels at some banks. A decline in company bank deposits and stricter reserve rules added even more pressure.
A risk manager at a major bank said the capital crunch is affecting bankers across the board. Some major banks were stretched so thin for cash that they were forced to use a “reserve repossession” procedure to meet government deposit reserve requirements.
Reserve requirements have been rising for months as monetary policy makers strive to control lending levels and consumer price inflation. The latest move came Jan. 14, when the central bank raised the deposit reserve ratio 50 basis points.
In response to the higher ratio, the overnight Shanghai Interbank Offer Rate doubled between Jan. 19 and 20. The overnight rate rose to 6.02%, while the one-day repo rate jumped 107% to 5.6%.
The risk manager said interbank rates jumped because, “for now, banks have gradually cut back investing in the capital market. The room for capital maneuver is very limited.”
Guo Shikun, a research manager at China Construction Bank, said the central bank’s latest decision to increase the deposit reserve ratio to 19%, coupled with the introduction of a differential reserve ratio system, would exacerbate a credit squeeze.
Banks certainly have no plans to stop lending. Many have guaranteed a steady pace of credit access for borrowers who started projects with loans in recent years and will need more money to finish. They also see lending as critical to maintaining good customer relations, which can be even more important to Chinese bankers than profitability, according to one senior bank manager.
So banks that promised to continue lending and yet must meet reserve requirements are now under pressure to boost customer deposits, particularly among savings-account holders.
Yet more than ever, Chinese savers are actively seeking high returns for their hard-earned cash and, in the eyes of many, savings-account interest rates are unattractively low. Thus, savings account “deposits at some banks virtually stopped growing in late January,” said a senior finance manager at a leading bank.
Banks have been forced to compete among themselves for business from among stalwart customers who continue to choose savings accounts, such as the elderly, according to one bank manager. Yet younger people have been steering more of their wealth into interest-bearing financial products and the capital market.
Traditionally, the good news for banks was that at least some of that consumer money invested in the capital market would wind up in banks anyway, the manager said. These funds usually flow from securities firms and fund companies to bank vaults toward the end of each year.
Yet capital-market-related cash transfers to banks actually declined in late 2010 from levels seen in previous years. Moreover, banks have seen a softening of deposits by companies. The senior manager said company deposits slowed in tandem with a cool-off for lending. He added that corporate deposits are unlikely to increase significantly in 2011.
“Deposits are growing more slowly than loans,” the bank manager said, “imposing extra constraints on the granting of bank loans.”
The central bank has called on lenders to increase credit by up to 13% in 2011.
Yet the senior manager noted that scaling up loans while maintaining loan-to-deposit ratios will mean that savings deposits “must match — or ideally exceed — that bank loans” in 2011.
Despite the liquidity squeeze, major banks managed to pay 2010 performance bonuses to branch managers, who were then instructed to reward subordinates. The result of a year-end performance-assessment meeting at a major bank in January involved the distribution of bonuses based on their annual deposit plans and loan-to-deposit ratios.
The senior manager said these bonus assessments point to a main reason for funding shortages: Most banks came close to the upper limit of loan-to-deposit ratios in late 2010, prompting them to raise savings deposits substantially. After the ratio assessments were completed, savings deposits fell in early January.
For that reason, signs of liquidity strain will become more visible after monthly and quarterly assessments in early 2011.
But at lower rungs of the ladders, the squeeze is already evident at some banks. Tellers working for the bank whose executives recently set bonuses, for example, were told that personal shares of the 2010 proceeds will be withheld until after they meet 2011 deposit targets.