Lending Surge Costs Some Banks Preferential RRR

Bloomberg: PBOC to Raise Reserve Ratios for Banks That Don't Meet Criteria
Some banks no longer meet criteria for preferential reserve requirement ratios and will have those levels increased, the People’s Bank of China said Friday in a statement. Prior to the announcement, Bloomberg News reported that some lenders will face a higher ratio as officials seek to limit the risks associated with last month’s jump in credit. The PBOC said its action wasn’t driven by the speed of lending.

The central bank also said a review it carried out found that some banks which previously didn’t meet the criteria for preferential ratios now do so. Adjustments to banks’ reserve requirement ratios will be made from Feb. 25, according to the PBOC.
Xinhua: RRR adjustment not related to credit surge: China central bank
To enhance financial support to the real economy, the central bank in 2014 introduced a targeted RRR-cut mechanism for banks engaged in proportionate lending to agricultural and small firms, along with a string of requirements attached for banks to be eligible for the narrow-based cut.

After reviewing the policy in 2015, the central bank found some banks could not meet the requirements, meaning they were unqualified for the narrow-based cut.
The central bank is correct in saying this change was not related to the credit surge in terms of the central bank's decision. Banks aren't being punished for lending, they are losing preferential status because their loan mix likely shifted away from small business and agriculture. In other words, the effort to increase lending to small business and agriculture isn't going well.

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