By Shu Zhang and Engen Tham
BEIJING/SHANGHAI (Reuters) - China's banking regulator has extended by two months a June deadline for banks to submit risk assessments over concerns it was putting strain on the lenders, two sources with direct knowledge of the matter said.
Under the leadership of Chairman Guo Shuqing, the China Banking Regulatory Commission (CBRC) started the year promising a "windstorm" to clean up the banking sector, which had been seen as failing to control risks as credit swelled.
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The CBRC has launched eight sets of rules in the months since March, and Guo imposed a June 12 deadline for banks to submit written assessments on their lending and other practices, according to an internal notice seen by Reuters.
That deadline has now been extended to mid-August, the sources said. While some lenders made the original deadline, adjusting their operations based on their assessments and feedback from the regulator, others have been unable to comply and have been given the extension.
The decision not to pressure banks who failed to meet the deadline reflects official worries that a tougher stance on banks could weigh on lenders and leave them and the economy weaker, the sources said.
The decision, which has not been officially announced, comes ahead of a party congress in coming months at which economic growth and financial stability are expected to be priorities.
The deadline extension - together with a strain on resources reported by sources at the CBRC - underlines how tough it will be for China to cut leverage and control lenders as growth in the world's second-largest economy eases.
One of the sources said the CBRC would not issue fines and has been avoiding any form of censure since the official deadline expired in June.
"The thunder roars loudly, but little rain falls," said one banker at a regional lender who accompanied officials during an inspection earlier this year.
The CBRC did not respond to a request for comment.
In July, President Xi Jinping announced the establishment of a new financial oversight body to improve coordination among regulators. While Xi said the power central bank would play a bigger role in managing risks in the financial system, the role of the CBRC in the new committee is unclear.
The health of China's banking sector, whose assets account for more than 90 percent of China's total financial assets, is a concern of global proportions, and investors and bankers have urged a tougher stance from the regulator.
Those concerns will loom over the National Congress of the Communist Party later this year, a gathering held every five years at which major reshuffles of senior leaders can be expected.
Two people at the CBRC said regulators were worried that some banks - especially small- and mid-sized banks that rely heavily on the interbank market - could strain under more scrutiny, which could hurt the overall financial system and slow growth.
In May, a senior CBRC official, Xiao Yuanqi, told banks that the release of tougher CBRC rules and on-site inspections by the regulator would not have a negative impact.
"Don't be nervous," he said at a press conference, referring to market jitters over the impact of the new rules.
CBRC officials say they have found that on-site inspections to crack down on regulatory arbitrage and enforce rules on interbank lending and wealth management products have been tougher in practice than in theory.
Part of the issue is a lack of resources. The CBRC has not received increased resources, even as demands on the regulator grow, officials at the regulator said. Salaries have stayed flat, and fallen in some cities, and staff is sparse outside the capital.
The head of one Ping An Bank Co <000001.SZ> sub-branch in southern China said that his bank had never had a spot check.
In its 2016 report ranking Asian countries' corporate governance standards according to a number of factors including enforcement, the Asian Corporate Governance Association (ACGA) highlighted insufficient human resources at the main Chinese regulators as an ongoing problem.
But China bank stocks have been performing well, an indication of confidence in the crackdown, said Jiahe Chen, chief strategist at Cinda Securities Co in Shanghai.
"You never see the financial sector kill itself because there is too much regulation, suicide always happens when there is no regulation," Chen added.
(Reporting by Shu Zhang in Beijing and Engen Tham in Shanghai; Editing by Philip McClellan)