One of the Central Finance Conference’s requirements on finance is “to make efforts to upgrade the innovative capability and the service level in finance”. Why should so much importance be attached to financial innovations? How should commercial banks carry out financial innovations so as to satisfy requirements of the ever-developing economy and society? With such questions, Zhao Xiaoqiang, a reporter of Economic Daily, had an interview with Ma Weihua, President of China Merchants Bank.
Reporter: One of the Central Finance Conference’s requirements on finance is “to make efforts to upgrade the innovative capability and the service level in finance”. Why should so much importance be attached to financial innovations?
Ma Weihua: On last December 11, China began to fulfill its commitment to the WTO; the Chinese banking industry began to competed against the international banking industry, and it became faced with impacts and challenges from various aspects in terms of conception, system, institution, technology, product, profit generation and thoughts for supervision. In general, the revenue structure of a bank can reflect its level of financial innovation to some extent. For the moment, the main source of revenues for banks in China is still the traditional revenues from interest differences. The highest proportion of non-interest earnings in various banks is less than 30 percent while that in quite a lot of commercial banks simply maintains less than 10 percent. Thus, it can be seen that it is very urgent for Chinese banks to accelerate their financial innovations. Financial innovation is the source of vitality for commercial banks in China and the only way for them to strive for a survival and development.
Moreover, the proportion of enterprises’ direct financing has increased by a large margin in recent years; the traditional management and profit-making pattern of “relying on major clients” for earnings from interest differences that commercial banks used to adopt is being impacted. It is necessary for commercial banks to transform their management thinking and management strategies while making more efforts to develop financial innovative products and new profit-making patterns.
In the meantime, the financial awareness and financial demands of residents in urban and rural areas are becoming stronger and stronger. They are not satisfied with traditional savings and simple investment forms but require that banks offer various financial products for them to choice and create diversified investment products and investment patters to satisfy their demands for investment, risk evasion and value maintenance and appreciation. And the banking industry must conduct reforms and innovations in time to satisfy the diversified financial demands from various aspects of the economy and the society.
Reporter: As the reform and opening-up in the financial industry has been accelerated, financial innovation in China’s banking industry has been obviously expedited. What about the basic conditions for the financial industry’s financial innovations? What kind of favorable achievements have been made? And which aspects should be ameliorated and enhanced?
Ma Weihua: First of all, innovations in products and services have been boosted continually. For example, such emerging financial products as personal housing mortgage loans, personal consumption loans, sale and trusteeship of funds have not only satisfied people’s diversified financial demands to some extent but also expanded banks’ operational spaces and their profit-making channels. So far as banking services are concerned, commercial banks in China have their service patterns ameliorated continually through advocating human-based intimate services and constructed a diversified service network system that has integrated both physical channels and electronic channels; as a result, the relationship between banks and their clients has been improved, the traditional image as a service provider holding a thinking that “banks the first” has been substantially changed, and service quality has been greatly improved.
In the second place, the management and technical innovations have been boosted incessantly. For instance, many banks have introduced such methods as comprehensive risk management and capital adequacy ratio management while making reference to international common practices to carry out the “five-category” classification of loans. As to technical innovations, commercial banks in China have made greater efforts in their investment in technology and expedited their construction of computerized financial services; at present, the intranet has been applied almost within respective banks and the linkage across respective banks is also being rolled out gradually. Meanwhile, payment and clearing systems by virtue of banking cards, electronic remittance systems and funds transfer systems have been put forth. Banks’ function in offering services has been increasingly boosted up.
Thirdly, innovations in conception and culture have been boosted in depth.
For the time being, risks must be covered by capital and risks undertaken by banks must be measured as costs. The thinking that banks must take a market value increasing steadily in the long run as an objective for their management has been accepted by domestic banks and applied in their management and administrative practices. In the meantime, respective commercial banks are also actively cultivating and building up cultural systems suitable for their development.
For sure, commercial banks in China still lag far behind internationally advanced banks in terms of financial innovations due to their limitations in terms of history and practices. For example, at present, there still exist problems in the following aspects as far as product innovations are concerned: firstly, product innovation is on an insufficiently high level and the phenomenon of homogeneity is rather conspicuous; secondly, the structure is imbalanced and among the existing innovations in financial products, innovations concerning liability products are obviously more than those concerning asset products; thirdly, in Chinese commercial banks, the benefits are less favorable: there has not shaped up organic and efficient linkage between the product innovations and the marketing, such innovations have failed to yield sufficient effects while having made insubstantial dedications to the growth of respective banks’ benefits; fourthly, there are rather a lot of hidden troubles: while diverting and dispersing risks, financial innovations of commercial banks will generate new risks. For the time being, latent risks will be brought forth as commercial banks tend to build up regulations after having made product innovations.
Reporter: China Merchants Bank has been playing a leading role in the domestic banking industry so far as financial innovations are concerned. How have you managed it? And how to maintain your leading status in the future?
Ma Weihua: In recent years, China Merchants Bank has been developing in a comparatively good and rapid manner with its influences becoming ever larger in the market. Such a result is inseparable from the fact that we have been attaching superior importance to financial innovations persistently. It can be said that financial innovations are where the ultimate impetus for China Merchants Bank to maintain a rapid and healthy development lies. So far as the financial innovations of China Merchants Bank are concerned, they can be summed up as marketability, growing ability and stability according to my experiences.
Early as 10 years ago, we took the lead to launch our all-in-one cards; the foundation for China Merchants Bank to develop its retail banking services was thus laid. For the time being, China Merchants Bank plays a leading role among joint-stock commercial banks with the proportion of its savings deposit balance and that of its individual loan balance maintained at about 40 percent and 18 percent respectively.
Having developed for nearly 20 years, we have shaped up a culture with brilliant features and our innovative culture and risk culture have become more and more mature with time going on. Also, China Merchants Bank has a professional management team that has remained stable in a long term. Most members of the management team are provided with experiences in the banking industry while being highly enterprising to act as a professional manager. A favorable enterprise culture and a stable management team have constituted the steady expectations and a solid pivot for China Merchants Bank’s sustainable financial innovations.
