Monday, November 28, 2005

One of my colleagues defended the avian flu emergency loans. Again, I agree that the purpose of these loans is commendable. However, there are ways to provide the liquidity without damaging the bank commercialization process. For example, loans through the policy banks and direct injections from the treasury. We are not talking about too much money here, and the treasury should be able to take the hit. The second problem is that whenever they have a policy loan program, local officials would pressure banks to provide "policy" loans which are in reality diverted to local construction projects....etc. Banks are willing to do this because the central government has given the green light on these loans. If borrowers default, banks are not held responsible. Again, I don't think we are talking about a lot of money, but much of this will become NPLs.

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