China Economic Daily: Why Are These Banks' Letter of Credit Businesses "Receiving Penalties"

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Since the beginning of this year, the official website of the China Banking and Insurance Regulatory Commission has disclosed penalties against multiple banks for violations related to letters of credit and forfaiting business, covering state-owned banks, joint-stock banks, city commercial banks, and other institutions. Opening letters of credit without a genuine trade background and poor management of forfaiting are the main reasons banks cross regulatory red lines.

In recent years, as the regulation of bill business continues to tighten, domestic letters of credit, which have similar functions, have rapidly expanded due to advantages like low capital occupation and flexible terms, showing a growth trend. Specifically, according to the “China Trade Finance Industry Development Report (2024–2025)” issued by the China Banking Association, the settlement volume of domestic letters of credit reached 3.62 trillion yuan in 2024, a year-on-year increase of 17.89%, setting a new record.

The rapid development of bank letter of credit business is driven by a dual effect: the market demand shift under strict bill regulation and the inherent characteristics of letters of credit. The essence of “bill-to-credit” transformation is a strategic choice made by enterprises and banks under regulatory differences to meet financing and business expansion needs.

“On one hand, bill business is subject to comprehensive strict regulation. The China Bills Exchange has implemented full-process registration and information disclosure, with increasing requirements for background verification and scale control. The cost of violations for banks’ bill business has significantly increased, and enterprises’ avenues for arbitrage through bill rotation and short-term financing are being continuously tightened. Rigid financing and settlement needs urgently require alternative tools,” said Gao Haoyu, professor at the School of Finance and Economics, Renmin University of China. On the other hand, domestic letters of credit have dual attributes of settlement and financing, covering scenarios such as bulk commodity trade and supply chain finance, which can meet the operational needs of different enterprises. Their operational flexibility better matches the diverse financing and settlement demands of the market. Additionally, supporting businesses like forfaiting can help banks offload assets and increase intermediary income, filling the scale and profit gaps caused by restrictions on bill business, making them an important tool for banks to expand their business. In trade finance scenarios, they quickly meet market demand for bills and promote continuous growth in business scale.

With the rapid development of domestic letters of credit, related penalties have also increased. This year, several banks have received penalties for their letter of credit business. One key reason is inadequate review of trade backgrounds. For example, on February 14, the Shanghai Regulatory Bureau of the China Financial Supervision and Administration disclosed that China Construction Bank Shanghai Branch was fined 4.2 million yuan for serious violations in forfaiting business management and other illegal activities. Another more serious issue is banks issuing letters of credit with untrue trade backgrounds due to insufficient review.

This year, multiple banks have been penalized for their letter of credit business, reflecting strengthened regulatory oversight of the entire process and targeted correction of weak risk control links amid rapid industry growth. A genuine trade background remains the core prerequisite for conducting letter of credit business, and prudent management throughout the process is key to compliance.

“Poor trade background review has become a major reason for penalties, indicating that some banks still prioritize scale over risk control in business expansion, conducting only formal review of trade documents without penetrating verification. This is a significant cause of violations in letter of credit operations,” Gao Haoyu said. Actively issuing letters of credit without a genuine trade background has shifted from mere risk management negligence to subjective misconduct, violating the fundamental purpose of serving the real economy. As a result, it faces stricter regulatory penalties. This clearly signals regulators’ zero-tolerance stance toward substantive violations.

From a policy perspective, by December 2025, the State-owned Assets Supervision and Administration Commission issued the “Implementation Measures for Responsibility Investigation of Illegal Operations and Investments of Central Enterprises,” which includes responsibilities related to group control, such as violations by subsidiaries in engaging in financing trade, “rotation,” “single transactions,” and false trade activities. Meanwhile, the China Banking and Insurance Regulatory Commission’s inspections focus more on large fund rotations and the authenticity of trade backgrounds, especially issues like deposit-loan mismatches, fund recycling, and unreasonable low-cost financing.

Looking ahead, industry experts believe that for domestic letter of credit business to develop healthily and sustainably, it is crucial to build a comprehensive compliance and risk control system through multi-party collaboration, focusing on serving the real economy. Business scale growth must be matched with risk management capabilities, which is key to industry regulation and development.

Source: Economic Daily

Author: Peng Chuanxu

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