Rule Changes on Governing Loan to Deposit Ratios to be Calculated

Rule Changes on Governing Loan to Deposit Ratios to be CalculatedThe People’s Bank of China is changing some rules on the governing of loan to deposits ratios will be calculated at banks starting next year. The changes in rules is based on a copy of a document from the central bank which they say will help boost liquidity conditions. The bank will be including savings coming from banks for non deposit taking financial institutions in bank deposits that will expand the base for calculations of loan to deposit ratio.

Based on the current rules, banks are allowed to lend 5 percent of their deposits and sources last week said that 24 major financial institutes were told that even if inter banking deposits are included in the base, there will be no need to set aside additional reserves which will leave more room for liquidity that is available for investment and lending. The move is said to be an attempt to reinvigorate productive business investment even without resorting to across the board cuts in order to reserve the required ratios.

The People’s Bank of China is already effectively loosening up enforcement of standing loan deposit ratios and as allowed more capital to flow into the system prompting concerns that included a looming deflationary pressure and a slide in industrial activity. But the loosening up was then followed up by a heavy leverage rally in the stock market that went without any noticeable impact on leading or short term money rates.

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