By Cheng Zhiyun, Chen Wenya and Xi Si
Published: 2008-05-26

From News, page 4, issue no. 368, May 26, 2008
Translated by Ren Yujie
Original article

Chinese commercial banks have been told by the government to waive loan repayments for earthquake victims who are now unable to settle their bills.

The China Banking Regulatory Commission (CBRC) issued a notice on May 23 demanding banks to write off credit extended earlier to quake victims as bad debt if the borrowers met the following criterions: suffered huge economic losses from the Sichuan earthquake and failed to be compensated by insurance; or despite insurance compensation still fell short of repaying debts.

CBRC says the reclassification has a legal foundation with the Ruling on Bad Debts Management for Financial Institutions (revised 2008). The CBRC notice's stated objectives were to ease the suffering of quake victims and create conducive environment for rebuilding efforts. However, industry sources said it was akin to transferring the economic losses incurred by the May 12 earthquake to commercial banks.

Commercial Banks to Foot the Bills
At present, it is still unclear how much the banks will have to own up to; but based on research by the BOC International (China) Limited, the Chinese banking industry may suffer losses between five and 13 billion yuan from the earthquake, while some market research institutions believed the losses could run well over 20 billion yuan.

Official data revealed that some 436,000 buildings were destroyed or badly damaged in the 8-magnitude earthquake that hit Sichuan province. Some 4.8 million people were made homeless as a result.

As the Chinese commercial insurance regulations failed to cover losses resulting from the earthquake, concerns arose as to who would pay off mortgages for damaged houses.

Chinese commercial banks were still in the process of calculating potential non-performing mortgages caused by the earthquake. Meanwhile, a four-party discussion on the solution framework had started between the CBRC, the Chinese Central Bank along with taxation agencies, the local government and commercial banks, according to China Banking Association (CBA) deputy president Yang Zaiping.

On May 19, CBRC and the central bank had issued an emergency order to commercial banks, urging the latter to refrain from pushing for loans repayment based on normal timetables in disaster-hit areas. Instead, the banks were told to forgo fines, interest charges and not to black-list companies and individuals who failed to repay on time. 

However, the authorities had then failed to issue a clear directive on the management of mortgages for houses damaged in the quake.

Central Bank deputy governor Su Ning had once said that the government would find a win-win solution for the commercial banks and the people.

Drawing Overseas Experiences
A legal practitioner told the EO that international standards prescribed that even if houses were destroyed in natural disasters like earthquake, the contracts between banks and their borrowers remained valid, and borrowers were required to pay off mortgages.

However, in China, when properties were not covered by insurance for natural disaster, debtors were basically incapable of repaying their outstanding loans.

In an internet forum, a netizen stressed that it was the system at fault to exclude earthquake from housing insurance coverage, thus, it would be unreasonable for the house owners to foot the bills. Some of the public also held the view that since major Chinese commercial banks were state-owned and had drawn resources from the nation, they should bear some social responsibilities.

Bank of China's deputy president Zhu Min agreed that delaying loan repayment collections and waiving late payment charges for a certain period were necessary for stability and assessing ground situation. However, Zhu maintained that the final solution should be based on market and commercial principles.

Zhu's view was echoed by most bankers, however, none of them could clearly state what they meant by such principles.

Based on Taiwan's earthquake experience in 1999, the Taiwanese authorities granted housing assistance funds to people who had lost their homes, and rental subsidies to affected tenants. In addition, its Central Bank directed the Postal Savings Bank to set aside 100 billion worth of Taiwanese currency to provide low-interest loans with longer repayment periods for home purchases and restoration.

Under the Taiwanese regulations, every quake-affected family could obtain 3.5 million Taiwan dollars in low-interest financing (of which 1.5 million were interest-free). The quake victims in Taiwan once formed an alliance to lobby for the Taiwanese authorities to compel financial institutions to write off their credits. However, the authorities maintained that credit agreements made between the banks and borrowers should be resolved through commercial mechanism.

Public data also revealed that following the 1995 earthquake in Hanshin, Japan, about 38% of the mortgage takers continue with their existing loan repayment. 

Mortgage Losses Limited
The possibility of commercial banks suffering from quake-related non-performing personal mortgages would be limited, according to an industry source.

The source said the worst-hit disaster areas in Sichuan's Wenchuan and Beichuan county had limited commercial banking facilities, thus the number of customers taking loans for home purchase were limited too.

Banks with wider coverage in the disaster zone include Agricultural Bank of China, the local Cheng Shang Bank, Postal Savings Bank of China, and the Rural Credit Union. Postal Savings Bank does not provide housing mortgage while the Rural Credit Union only has a limited pilot region for mortgages.

Agricultural Bank of China deputy chief Zhang Yun disclosed that one of the bank's branches in Sichuan had registered 1.55 billion yuan of losses from personal loans, of which 1.05 billion yuan came from mortgages.

Standard & Poor's credit analyst Liao Qiang said based on 2007 data, the ratio of housing mortgages only made up 3.21% of the total credits provided by national banks with coverage in Sichuan. He said the sum of corporate loans was way ahead of mortgages.

"Though the earthquake incurred huge damages and losses to house owners, the main disaster areas are economically less developed, thus, home loan borrowers are few," Liao added.

One source from a Sichuan branch of the Industry and Commerce Bank of China (ICBC) told the EO that most of the collapsed houses during the quake were old buildings, while those under mortgage terms were basically built after year 2000 with a higher quake-resistance capacity.

The source said ICBC's most urgent task in Sichuan now was to resume operation in disaster-hit areas to ensure quake victims could withdraw money. He said it was too early to estimate the real losses incurred, as that would require bank workers to verify each and every loan with the concerned client, which would take time.

Background: What the analysts say...

BOC International
Net bank losses are approximately 5 to 13 billion yuan. Net profits will slide 0.7 to 1.8
percent. Within that, losses caused by non-performing loans amount to 8 to 14 billion yuan.

China Securities Research Analyst
Losses to banks due to the earthquake will reach 20 billion yuan

BNP Paribas
The proportion of retail mortgages of Industrial and Commercial Bank of China (ICBC) in Sichuan is 0.5 percent, among which 66 percent are in Chengdu, which was affected little by the quake. Assuming 5 percent of loans in the disaster area were mortgages, losses would be up to 1.1 billion yuan, or 1 percent of banks net profits in 2008.

Merril Lynch Securities
Mainland banks listed in Hong Kong, if 5 percent of loans in Chengdu and Chongqing go bad,
it will increase the costs of their credit by 15 to 30 base points, and the total amount of bad loans to increase 10 to 20 percent.

Chinese banks' credit services in Sichuan are relatively small, at 60 billion yuan in 2007, just 3 percent of all commercial bank loans. As a result, the earthquake will not lead to widespread losses for these banks.