Deposit insurance system proposed

China revolutionised its banking sector by formally proposing a deposit-insurance system, a long-awaited move that is aimed at better disciplining its lenders and their customers.

The State Council, the Chinese government’s top decision-making body recently released a draft of a plan to insure up to CNY500,000 in deposits made by businesses and individuals per bank. Chinese officials involved in the deliberations say it could be put in place as early as January, according to a report in the Wall Street Journal.

Deposit insurance suggests that Beijing will allow banks to fail because the depositing public would be protected from such a shutdown. The move comes at a time of mounting worries in China after years of lending to troubled industries ranging from real estate to solar panels to steel.

As China’s economy has slowed, soured loans in the country’s banking system surged 10 percent in the third quarter to CNY766.9 billion. While banks say that amount remains a tiny part of their loan portfolios, the rise is the biggest percentage increase since 2005.