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March 13, 2015

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Home » Business » Finance

Deposit insurance scheme to be rolled out in first half of the year

By Feng Jianmin | March 13, 2015, Friday | Print Edition

CHINA will roll out a deposit insurance system in the first half of this year as part of efforts to liberate interest rates and improve funding efficiency, central bank governor Zhou Xiaochuan said yesterday.

It is an important step to protect consumers’ bank deposits in a financial crisis as the central bank is “highly likely” to fully liberate the deposit rate this year, Zhou said at a press conference on the sidelines of the National People’s Congress annual session.

Regulators have indicated on various occasions that China’s deposit insurance may offer limited compensation for depositors and differential insurance premium rates for commercial banks.

A draft regulation released by the State Council in November set maximum compensation at 500,000 yuan (US$81,433) per depositor if a bank suffers insolvency crisis or bankruptcy.

Zhou said yesterday that the draft regulation had received positive feedback.

“I personally estimate that the finalized regulations will be released in the first half of this year,” Zhou said.

The move is considered a precondition for China to free up deposit rates, the last step in its interest rate liberalization.

Zhou said the possibility of fully liberalizing China’s interest rates mechanism is “very high” this year.

China has many accomplishments in liberalizing its interest rates over the past years, and it is “a reasonable prediction” that China is very close to the last step of fully liberalizing interest rates, namely scrapping the upper limit of deposit rates, Zhou told reporters.

In February, the central bank allowed banks to offer deposit rates within 30 percent above the benchmark, up from the band of 20 percent previously.

Yi Gang, deputy governor of the central bank, said conditions for the liberation were maturing as banks adapted to differentiated deposit rates and a market-based benchmark is taking shape based on the interbank seven-day repurchase rate.

Banks and clients have wider options to choose from now that banks can set different prices based on different conditions.

Small banks now usually offer the ceiling rate while large banks would raise their rate by about 10 percent, Yi said.

The liberation is considered crucial to correct the inefficiency of funds use when interest rates are tightly controlled.

Smaller banks are not competitive in absorbing deposits and small businesses are unable to acquire loans from large banks because of the small deal size and the lack of guarantees.

Zhou said the authority will continue to help balance market needs through ongoing interest rate liberalization, and will put forward more supporting measures for small businesses to acquire funds.

Rules were put forward last year to lower reserve requirements for banks with heavy business with small companies, encourage development of guarantee agencies, and improve performance assessment for banks to correct their preference for large deals.

Concerning the booming but opaque online peer-to-peer borrowing platforms that could offer funds for small borrowers, the central bank said it will encourage innovation and implement “classified and appropriate” regulations.

Investors will suffer losses if borrowers are unable to pay back debts, the owner of the platform flees, or the platform runs short of money due to poor risk management.

Zhou said investors need to be careful in selecting peer-to-peer products.

The regulator would not be responsible for losses from defaults on such platforms.

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