The success of China's banking reform, to a large extent, hinges on holding bankers accountable for each loan they grant.
A joint circular recently issued by the Ministry of Finance, the and the China Banking Regulatory Commission warned of banks' illegal loan management during the on-going banking reforms.
To transform its major state-owned banks into ingenuous commercial banks, the country has massively written off non-performing loans to improve their balance sheets.
The logic behind such efforts was that to better equip them for upcoming competition with foreign banks, the State has to lessen major domestic banks' burden of bad assets.
Given that a large number of such non-performing loans resulted from the State banks' long-term support for low-efficiency state-owned enterprises in previous years, it is reasonable for the State to share some of the domestic banks' burden.
However, such a bailout should not excuse those who had made wrong decisions on lending, especially those who have been involved in illegal lending activities.
A thrilling case report of the National Audit Office published early this year revealed that a local branch of a major State bank in Northeast China was found to be hand in glove with local courts in counterfeiting legal papers to write off bad loans.
Such malpractice clearly demonstrated that measures taken by the State to facilitate reforms have been exploited by some bank employees to hide their wrongdoings.
By giving a belated warning, the banking watchdogs displayed a new understanding of the severity of the problem.
In comparison with what the banking authorities had done to reduce banks' non-performing loans, concrete efforts to heighten internal management are far from enough.
To survive increasingly fierce competition, domestic banks must strengthen checks and balances by themselves.
If massive write-offs of non-performing loans are meant as carrots to encourage banking reforms, tough measures to punish those who grant loans irresponsibly should be put into place as the stick to secure reforms from derailing.
After all, a man-made balance sheet, no matter how attractive it may appear at the moment, does not count as much as an accountable staff in terms of Chinese banks' long-term development.
(China Daily October 12, 2004)
