(Yicai Global) March 7 -- Chinese regulators have eased restrictions on the loan loss provisions in the banking sector and instituted tailored supervision, namely 'differential policies for different banks' in a move expected to unleash huge bank profits.

China Banking Regulatory Commission (CBRC) issued a notice adjusting the supervision of commercial bank loan loss provisions (Notice) on Feb. 28 to adjust the current oversight requirements on commercial banks' loan loss provisions. Regional CBRC branches have now received the Notice, as Yicai Global learned yesterday.

The changes are as follows: the required provision coverage rate is adjusted to 120 percent-150 percent from 150 percent, while the required loan loss provision rate is changed to 1.5 percent-2.5 percent from 2.5 percent. Within the above ranges, regulatory authorities at each level should clarify the specific loan loss provision requirements for banks, per the principles of 'homogeneity' and differential policies for different banks.

Homogeneity means that regulatory authorities should set differentiated implementation rules for institutions of the same category and issue and enforce these in a timely manner. Differential policies for different banks means that, based on the Notice and its implementing rules, regulatory authorities and CBRC regional offices should further clarify the supervision requirements on loan loss provisions for each specific bank.

A cross-provincial urban commercial bank with huge assets is not homogeneous with a city-level urban commercial bank, per the homogeneity principle. Differential policies for different banks literally means that specific supervision requirements on the loan loss provision should exist for each individual bank to reflect its specific supervision standards, said Liu Chengran, an analyst with the Institute for China Finance Research.

Lowering the red line of the provision coverage rate and loan loss provision rate will unleash huge bank profits, per analysis by sector insiders.

Regulatory authorities at all levels should urge commercial banks with an actual provision coverage rate of less than 150 percent or with a loan loss provision rate of less than 2.5 percent to intensify their divestiture of non-performing loans. The total amount of these disposed of in one year should be no lower than the previous year's tally. Profit increases stemming from withdrawal from loan loss provisions should not go to bonuses or added dividends, but should instead be reserved in banks to maintain the basic stability of their loss absorption capacity. With other factors unchanged, expenditures spared from withdrawal from loan loss provisions should not apply to reduce the credit cost rate, per the Notice.