Banking Regulator Says It Inspected Over 1,800 Rural Banks, Punished Shareholder Misconduct

Zhu Shumin, vice chairman of the China Banking and Insurance Regulatory Commission, speaks at a press conference.

China’s banking regulator inspected over 1,800 rural banks, 80% of the total, from 2018 to 2020, and took measures to prevent and punish shareholder misconduct, a senior official at the watchdog said recently.

The three-year campaign aimed at rural lenders was launched as the China Banking and Insurance Regulatory Commission (CBIRC) sought to defuse mounting risks at smaller banks and better regulate shareholder behavior in the wake of a crop of corruption and embezzlement scandals.

“(The CBIRC) restricted the voting rights of more than 2,000 shareholders and ordered (some of them to) transfer 3.34 billion shares,” Deputy Chairman Zhu Shumin said in a Tuesday article published on its website (link in Chinese).

After investigating 47,000 shareholders who held at least 1% of a rural bank’s shares and nearly 100,000 people connected to them, the CBIRC found that some had illegally taken control over banks’ operations or benefited from related-party transactions, Zhu wrote.

“A few shareholders even illegally embezzled bank funds, turning banks into their own ‘ATMs’,” Zhu said.

In recent years, risks in China’s small and midsize banks have become a growing concern for policymakers, as rapid credit expansion has led to a large increase in nonperforming loans on their books amid the ongoing economic slowdown.

April central bank data showed that of China’s 4,005 small and midsize banks, 15% did not meet the minimum required capital adequacy ratio of 10.5%, and 532 were at rather high risk, mostly rural lenders.

Some banks’ poor risk management and shareholder recklessness have also amped up the risk. In North China’s Shanxi province, tens of billions of yuan were lost due to embezzlement and other illegal activities at the Shanxi Rural Credit Union. Some of its former leaders have been placed under investigation by the local anti-graft watchdog.

Senior officials at several rural banks in the eastern province of Anhui have also been placed under investigation over the past few months.

Zhu said that some institutions had expanded without caution through interbank businesses and risky investments which deviated from their core business of issuing credit and serving farmers and small businesses.

Zhu called for greater oversight over rural banks’ shareholders and connected-party transactions, and a crackdown on embezzlement. He said that shareholders who break the rules will be subject to a range of punishments, including restrictions on their voting rights, confiscation of their ill-gotten gains and forced equity transfers.

Rural banks were also told to focus on their core business and pay more attention to risk prevention.

Last month, China allowed 18 provincial-level governments to replenish the capital of some small and midsize banks via government bond sales, in a bid to defuse their risks and allow them to offer more credit to small businesses. Smaller enterprises have been especially hard hit by the Covid-19 pandemic, raising concerns about unemployment. The recapitalization program involves 200 billion yuan ($28.8 billion).

Contact reporter Guo Yingzhe (yingzheguo@caixin.com) and editor Joshua Dummer (joshuadummer@caixin.com)

Download our app to receive breaking news alerts and read the news on the go.