Lenders will need to improve services: experts

The possibility of deposit outflows from small banks prompted by the new deposit insurance system, which will take effect from May 1, will bring benefits for China's banking industry, Zhou Xiaochuan, governor of the People's Bank of China, was quoted as saying Tuesday by China Business News.

Zhou also said the new system could help to ease market access for new banks.

The deposit insurance system is intended to protect depositors if their bank suffers bankruptcy. The maximum compensation has been set at 500,000 yuan ($80,600) per depositor.

Zhou said that because the banking industry has become more competitive, an insurance mechanism is needed to guarantee both depositors' rights and the stability of the sector. He also said it was important that the system did not rely upon taxpayers' money.

Zhou noted that the 500,000 yuan compensation limit would ensure that 99.6 percent of depositors would receive full compensation in the event of their bank closing.

The insurance mechanism will also enhance the credit ratings and competitiveness of medium and small-sized banks, analysts said.

But the 500,000 yuan compensation limit could have some adverse effects on medium and small-sized banks, said Shao Yu, chief economist at Orient Securities.

"People with deposits of more than 500,000 yuan might be worried about not getting the rest of their money back if the bank fails. So there might be a transfer of deposits, especially large deposits, from small banks such as rural financial institutions, to larger, better qualified financial institutions," Shao told the Global Times on Tuesday.

However, the influence of deposit outflows from small banks will be limited, since most deposits at these banks are relatively small, according to analysts.

Xi Junyang, a professor with the Department of Finance at the Shanghai University of Finance and Economics, told the Global Times on Tuesday that although medium and small-sized banks might lose their larger clients because of the deposit insurance system, it would also motivate them to improve their services.

"They will need to provide better services and strengthen risk-control management in order to avoid excessive loss of deposits," said Xi.

Zhou said that pressure tests and bankruptcy scenario simulation tests, particularly for small-sized financial institutions, have already been conducted ahead of the launch of the insurance system.

An analyst at Haitong Securities surnamed Lin told the Global Times on Tuesday that the deposit system might allow for eased market access for new banks, but in the short term it would not prompt an increase in the number of private banks as the threshold for the sector is still very high.

"Most of China's private banks are still struggling to build a basic service system. Whether private banks will flourish depends more upon their operation in the long term," Lin said.

According to Zhou, banks will have to pay 0.01 to 0.02 percent of their deposits into a fund for the deposit insurance system, much lower than the level adopted by most other economies.

Xi told the Global Times that the relatively low insurance rate would avoid putting too much pressure on banks.

Zhou also noted that China's deposit insurance system is a combination of a standard benchmark rate and a differential rate.

A differential rate means that financial institutions with higher risks should pay higher premiums than those with lower risks, and it can prevent lenders from making reckless investments, said Zhou.

He also emphasized that the insurance rate level might be adjusted in the future, "based on factors such as national economic and financial development, the risk status of financial institutions as well as the deposit structure."