The irregularities that the National Audit Office uncovered in the Agricultural Bank of China's (ABC) 2004 accounts point to a growing need to speed up and deepen the reform of Chinese banks.

According to a report the audit office released on Monday on its website, at this bank, one of the country's largest lenders, 157 bank officials were involved in 51 criminal cases worth a total of 8.86 billion yuan (US$1.1 billion).

Besides, the auditor also uncovered other irregularities in deposits worth 14.3 billion yuan (US$1.8 billion) and illegal loans worth 27.6 billion (US$3.3 billion).

In spite of the corrective measures it has adopted, this auditing report will surely deal a heavy blow to this bank.

It is said that 22 of the irregularities have so far been settled and 95 staff members have been punished. The bank has also improved its credit management and internal audit systems, and sent out more inspectors from its headquarters to supervise work at its branches.

But that is still not enough.

In market-oriented reforms, the bank has lagged far behind China's other major State-owned commercial lenders, which have been recapitalized by the government and found foreign strategic investors. While China's three other major State banks have either got listed overseas or been finishing preparation for initial public offering, the ABC remains a long way from reaching the stock market.

With its customer base largely focused in rural areas, the ABC has traditionally been financially more troubled than other State banks and thus it is more difficult to turn it into a viable commercial lender. Although it was later denied by the ABC, last month's report that the government plans to break up this huge bank offers evidence of the difficulties in pushing forward the reform of this lender.

Since joining the World Trade Organization in 2001, the Chinese Government has put the reform of the banking sector, particularly that of the big four State banks, at the top of its agenda. Now, just months before the country is set to fully open its banking sector, Chinese banks should have already braced themselves for increasingly fierce competition with the foreign banking giants.

Unfortunately, the disappointing result of this audit shows that the ABC is nowhere near the completion of its market-oriented reforms.

The disadvantage of its business structure and its historical burden of high non-performing loans are all challenges facing the bank. But they cannot be used as an excuse by the ABC to drag its feet in terms of implementing crucial reforms.

Instead, the irregularities the audit office found bear full testimony to the urgent need to introduce sound corporate governance into this huge State bank.

By digging out all those irregularities in the ABC, the National Audit Office has assumed its vital role as an external supervisor on behalf of the public interest.

But to grow and win in the market, a commercial bank must rely on its own internal controls and risk management to check such cases of embezzlement.

The auditing report provides many lessons for all Chinese banks. The most important one is to improve governance by accelerating reforms.

(China Daily June 28, 2006)