Mainland banks are revving up for a spending spree as they overhaul communist-era risk management systems in a bid to convince global investors they are ready for prime-time banking.

Despite ambitious overseas listing plans, many of the country's top banks still have mountains to climb before they can truly manage risk like Western banks, with implementation of national systems and employee re-education topping their lists of things to do.

Mainland banks are expected to spend an estimated 23 billion yuan (HK$21.6 billion) on hardware, software and IT services this year alone, according to Analysis International, a Beijing-based technology advisory firm.

Much of that will be spent shoring up credit evaluation mechanisms and internal control systems to stave off bad loans and corruption scandals that have plagued the industry.

Foreign consultants like BearingPoint, McKinsey and Co and PricewaterhouseCoopers stand to reap windfalls from the spending spree.

Major software makers like Oracle and SAP, and hardware makers such as IBM and Hewlett Packard also stand to benefit.

Individual banks will easily have to spend US$100 million (HK$780 million) or more each to bring their risk management systems in line with global standards, said Matthew Ding, a managing director of financial services at BearingPoint. ``The Chinese banks right now...are still in the beginning of risk management,'' Ding said.

``But they are going in the right direction. They realize the problem, but they have a lot of things to do.''

The mainland's biggest lenders have spent the past decade amassing some of the hardware needed to manage financial risks, but are looking to buy new software to improve credit risk management to bring nonperforming loan levels to international norms.

Many have until recently suffered double-digit percentage levels of bad loans, a legacy of years of policy-based lending to loss-making state firms, compared with international norms in the single digits. ``This is one of the key areas we have identified pre-IPO that the banks need to focus on,'' said Ian Ball, a financial services consultant with IBM in Shanghai.

``They have a large bad loan portfolio, and if they don't improve in this area, that will continue to grow.''

Credit risk management at such banks remains a largely manual process, especially in the provinces, in a nation with at least US$200 billion in bad loans plaguing its financial system.

Failure to improve could mean losing market share to foreign lenders when the market is opened more widely late next year. Even with the proper hardware and systems, the banks still face a daunting task of training people sorely lacking in the skills needed to manage risk.

Educating staff long accustomed to banking under Communist Party guidance, despite moves to encourage commercial principles, could prove their biggest challenge, suggesting banks will lag their Western counterparts for years to come. ``Most Western banks have a century of commercial expertise. Here, what we find is that employees lack expertise,'' said Matt Bekier, McKinsey's head of Greater China financial services.

Opportunities for underpaid bank employees to siphon cash from depositor accounts need to be narrowed by improving internal risk controls - a fact highlighted by a spate of high profile banking scandals in recent years.

To reduce such risk, loan approvals to some industries have been centralized within big commercial banks.

REUTERS