Finance, Accounting and Control Case Study

Agricultural Bank of China: Unbanking on the Banking Reform

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Abstract:

As three of China's big four banks (BOC, ICBC and CCB) came under the spotlight after raising around $40 billion through IPOs, the fourth bank, Agricultural Bank of China, remained saddled with non-performing loans and was still uncertain when restructuring would begin. ICBC and ABC both had a NPL of around 35% at the beginning of the last phase of reforms. But, the situation seems to be unchanged for ABC, as the NPL stood high at 26% at the end of 2005, where as the other three banks reduced it to the level of around 4%. Primarily there were two reasons for ABC’s failure to take the advantage of reforms. ABC had long shouldered the responsibility to provide financial support to the nation's rural areas, which had led to a huge amount of bad loan. Unlike the state owned enterprises being the borrower in case of the three successful banks, most of the customers for ABC was individual farmers, small enterprises and common people. Moreover, saddled with $93 billion in non-performing loans, the lender needed a government bailout between $60 billion and $70 billion to restructure. The figure contrasted with a combined $60 billion that was given to three other banks since 2003. Usually, bank bailouts were dished out solely by the central bank's Asset management arm, Central Huijin Investment Corp. But it had been reluctant, so far, to say how much it would contribute in the Agricultural Bank's case. Secondly, these loans were more difficult to recover than those made to corporate clients.

Like other three state banks, the debt-laden ABC was also planning to become a joint-stock company and seek market listing to help streamline its operations. But, the bank's long-running problems with irregularities, reckless lending and corruption charges were allegedly severe. Agricultural Bank was also needed to develop its non-rural business to help broaden its base and attract investors. Authorities was yet to unveil a plan to revamp the bank, though there' was some speculation that the troubled lender might be broken up into smaller institutions

Pedagogical Objectives:

• To understand the role of reform in the growth strategy and revival of banking companies
• To have a brief understanding of the Chinese banking Industry
• To understand the reasons of failure in taking advantage of the banking reform
• To analyse the possible steps to be taken in order to become solvent and successful.

Keywords : Bank, China, Reform, Non-performing loan (NPL), Loan, Deposit, Capital adequacy, Finance Case Study, Gross domestic product (GDP), Book value, Huijin, Interest, Initial public offering (IPO), Province, Rural, Countryside