China’s Finance Ministry has proposed a new rule that would cap the amount banks have to set aside for bad loans, a move that could boost dividends to shareholders but weaken banks’ capabilities to absorb losses in the future, said the South China Morning Post.
Under the proposal, loan loss provisions for Chinese banks would be limited to no more than double the minimum regulatory requirement, with any funds left over booked as profit, according a new draft of financial institution accounting rules published on Thursday.
The minimum loan loss provision is currently set at 150% of impaired loans – in other words, a bank has to set aside RMB 1.5 ($0.21) for every RMB 1 of loan losses it expects. The proposed new rule would cap the loan loss reserve ratio at 300%.
At the end of June, at least seven listed Chinese banks had loan loss provisions of more than double the amount regulators required, according to their interim reports released by stock exchanges.