Dr. Gupta thinks, if China raises the provision coverage rate, it will help banks to reduce potential loss resulting from bad debts, but the provision coverage rate is just an "Post-incident" concept, and the final solution to the problem of bad debts should still resort to the "Pre-incident" measure of raising the capital ratio.

 

As for the news that China Banking Regulatory Commission has recently discussed the policy to raise the provision coverage rate of commercial banks to 2.5%, Dr. Gupta thinks it will help banks to reduce the potential bad debts loss. "Regulatory Authority worries about the rise in banks’ bad debts rate, thus it will be helpful to raise the loan provision coverage rate, but I’m not sure whether 2.5% is reasonable. I think the rate of 2.5% is not high, at least it can help banks that haven’t reached the level to reduce the potential bad debts loss", said Dr. Gupta.

 

Dr. Gupta believes that the provision coverage rate is an "Post-incident" concept, and the "Pre-incident" measure will be more effective. He says, "The importance is that when loan is provided, the reserve ratio should also be raised, thus ”buffering effect” will come to effect automatically. The key to solving the bad debts loss for banks lies in raising capital ratio instead of loss provision.

 

(Author: Ting YAN, Source: China Business News Daily)

 

(Dr. Anurag Gupta, Associate Professor in Finance from Case Western Reserve University, USA, Director of GARP Cleveland Chapter, and Director of Tongji-Case Western Reserve MSM-Finance and Tongji MBA Double Degree Program.)