New regulations by the Ministry of Finance announced yesterday are part of ongoing banking reforms designed to clamp down on risky lending and investment practices.
Under the first of two new regulations, banks are forbidden from lending more than 40 percent of their net worth to any domestic group, its affiliates or subsidiaries. Previously, the limit had been set at 40 percent for any single customer. The change is largely seen as response to the Chung Shing Bank (
In addition, the regulation also limits uncollateralized loans to a single commercial entity to a maximum 15 percent of the bank's net worth. If total loans have already exceeded the ceiling, the bank is forbidden from extending any further loans.
Analysts said this measure would significantly affect credit lines of large industry groups and conglomerates. Ministry officials said the purpose of the new regulation is to prevent concentrated financial risks in the banking sector.
"This is to improve the risk control of the banking sector," said Tsai Ching-nien (
A number of domestic corporate groups have had financial difficulties in recent years, which in turn have generated an abundance of non-performing loans at many local banking institutions. To minimize the risk to specific banks, the ministry has decided to impose a stricter credit policy on the banking sector.
The new regulation will become effective in 15 days, Tsai said. Any bank that violates the new rule will be fined between NT$2 million to NT$10 million.
A second regulation developed by the ministry loosens government control on banking industry investments in non-financial businesses, provided the bank reaches a capital-adequacy ratio of 9 percent, along with other conditions.
A capital-adequacy ratio measures the financial strength of a bank.
Previously, the ministry set strict rules for the banking industry to invest in non-financial businesses, such as telecommunications, computers or traditional industries.
Such rules have seriously restricted the ability of the banking industry to participate in a variety of investment projects.
"The banking industry should use its stockholders' money to participate in such investments, and not depositors' money," Tsai said. "Therefore, the ministry encourages the banking industry to set up holding companies to conduct such investments."
Under the new regulation, banks are permitted to invest in non-financial businesses without receiving prior approval from the ministry, but an application must be filed. If the ministry does not oppose the bank's proposal within 30 days of the application filing, it is automatically approved.
As for projects related to finance, banks will also be required to go through the application process with a 15-day review period. However, banks wishing to conduct such investment will have to meet certain criteria.
Banks that wish to invest in finance-related businesses will have to meet a minimum capital-adequacy ratio of 8 percent, along with sufficient reserves to cover bad loans.
Banks that wish to invest in non-financial businesses will have to meet stricter criteria, including a minimum capital-adequacy ratio of 9 percent, no financial regulation violations in the last 12 months, a relatively lower overdue loan ratio, sufficient reserves for bad loans and positive after-tax profits over the last three years..
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