China's banks this week found themselves turning away would-be depositors as they scrambled to comply with new rules that punish them for inflating their deposit totals.
In recent years, the final few days of each quarter have become a nervous time for banks. As liquidity has tightened and many depositors have shifted their savings into higher-yielding substitutes such as Alibaba's online money-market fund, Yu'E Bao, many lenders have struggled to attract enough traditional deposits to stay below the maximum 75 per cent loan-to-deposit ratio.
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That regulation, intended to ensure banks keep enough cash on hand to meet withdrawal demand, is enforced at the end of each quarter – providing an incentive to window-dress deposit totals. This was exacerbated by the desire to prettify quarterly reports to shareholders.
To meet the deposit challenge, many banks resorted to an all-hands-on-deck approach, requiring employees to meet a deposit target. That meant urging clients – and even family and friends – to transfer funds into the bank, typically only for a few days covering the quarter-end period.
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Bankers say an amateur "deposit broker" with about Rmb 2 million ($320,000) in idle cash might be able to earn Rmb 18,000 at no risk, just for parking it for a few days with a lender in need. Some lenders offered newmobile phones and other fringe benefits as an incentive for such activity.
But the bank regulator and finance ministry circulated new rules this month, imposing penalties on banks with suspicious fluctuations in their deposit balances. Regulators will suspend business approvals to banks whose month-end deposit total deviates by more than 3 per cent from the daily average over the previous month.
With the window-dressing mechanism entrenched at many Chinese banks, in recent days some lenders had to turn depositors away to avoid hitting that 3 per cent limit.
"Usually, meeting the quota isn't a big deal.But all of a sudden this afternoon, the branch head told us we had to start kicking deposits out," said a relationship manager at Bank of China."I called the client back, but they had already left for the [three-day National Day] holiday. What a debacle."
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A light-hearted commentary circulated among bankers on social media on Wednesday, carrying the headline "If there's a bank you hate, send them all your money before 12 tonight".
Analysts believe that the new rules will ultimately benefit China's banking system by reducing reliance on ad hoc measures, forcing lenders to manage liquidity more prudently.
"By preventing individual banks from taking overly aggressive steps to manage their deposit balances, the measures will help reduce volatility in the overall funding environment, which will in turn make it easier for banks to manage their liquidity," Christine Kuo, Asia Pacific banks analyst at Moody's, wrote in a note last week.