The race for cash among foreign banks in China is heating up as some struggle to rake in enough yuan deposits to meet a regulatory requirement that kicks in at the end of the year.

Many of the larger commercial banks operating in China, such as HSBC Holdings PLC and Citigroup Inc , say they have already met the new loan-to-deposit ratios (LDR) but some of the smaller players are at risk of failing to meet the requirement, bankers say.

The Chinese Banking Regulatory Commission (CBRC) is requiring all domestic and foreign banks in China to have an LDR of 75 percent or less -- meaning loans they have made should not exceed 75 percent of total deposits they have received -- as at December 31, as the grace period on a policy announced in 2006 comes to an end.

Some Chinese lenders are also scrambling to meet the requirement, but the fight for funds is particularly intense among some foreign banks that do not have retail operations, the bankers say.

For a wholesale bank, the 75 percent LDR is a big headache, said a banker at a foreign bank who declined to be identified because of the sensitivity of the issue.

It limits our ability to expand our lending business but I suppose we can't complain since it's a uniform rule across the sector and we are playing ball in their field.

Even the China head of Japan's biggest lender acknowledged that collecting deposits was not easy for many foreign banks in China.

One would have to cut down on lending or increase deposits. But there is very strong demand for loans from companies and cutting back on them would mean a shrinkage in operation. So it's natural for competition (for deposits) to heat up, Bank of Tokyo-Mitsubishi UFJ (China) President Eichi Yoshikawa told Reuters in a recent interview, adding his bank has met the target.

The banking regulator has not made clear what the repercussions will be if banks fail to meet the new requirement, but analysts suspect the punishment could be in the form of holding off on approving requests for new branch openings.

The CBRC has also yet to disclose how the new rule will be monitored, which bankers say makes business planning difficult.

They say if the LDR is to be monitored on a daily basis, banks would need to create enough buffer in case of large deposit withdrawals or during seasonal fund repatriation periods.


Around 40 foreign banks have set up locally incorporated units in China since 2007 when the first batch of banks were approved, hoping to ride on the boom in the world's second-biggest economy.

While business has been profitable for many, expanding retail deposits has been a struggle for most.

It's tough to get retail deposits within China simply because they don't trust these foreign companies, said Mike Werner, China banking analyst at Sanford Bernstein.

On the other hand, companies are reluctant to leave spare cash idling at banks as they look to expand further, leaving some banks in a tight spot to meet the LDR requirement.

As a result of the competition, rates on structured deposits have shot through the roof over the past few months in hopes of luring cash as banks are banned from competing on term-deposit rates, bankers say.

At year-end there may be a few who will not have reached the required deposit level, bankers say. A senior banker at an Asian bank said the CBRC has said there are still a few banks which have an LDR higher than 100 percent.

As of end-2010, the average LDR of 29 foreign banks that disclosed the figure was at 102 percent, according a report by PricewaterhouseCoopers. That compared with an average of 150 percent at end-2009, the report said.

The European Union Chamber of Commerce in China, in its 2011/21 position paper published last month, called on Beijing to either replace the requirement with an alternative measure or give a longer grace period for late-comers.

It said the adverse effect on the operations of small- and medium-sized foreign banks is particularly serious, as they only have a small branch network, thus limiting their ability to gather deposits from the broader public.

The current status quo results in a comparative disadvantage to those banks that entered the market only recently and is a significant obstacle to those planning to enter in the future, it added.

(Additional reporting by Terril Yue Jones in BEIJING; Editing by Jason Subler and Muralikumar Anantharaman)