China to impose stricter policy on bad-loan recognition

Authorities have taken a stricter stance on dealing with bad-loan issues since early 2018, when all lenders were forced to reclassify loans overdue for more than 90 days as non-performing.
Authorities have taken a stricter stance on dealing with bad-loan issues since early 2018, when all lenders were forced to reclassify loans overdue for more than 90 days as non-performing.PHOTO: AFP

SHANGHAI (BLOOMBERG) - China's banking regulator has told the nation's major lenders to accelerate recognition of nonperforming loans, as officials seek to bolster the quality of lending, according to people familiar with the matter.

The China Banking and Insurance Regulatory Commission in recent weeks used so-called window guidance to inform banks with nationwide operations that they must classify corporate loans overdue for more than 60 days as nonperforming, down from 90 days previously, said the people, who asked not to be identified discussing private information.

It's a change that underscores policy makers' more cautious stance on curbing risks and addressing the nation's longstanding issue of understating bad debt. Chinese banks are grappling with slower economic growth and record defaults in corporate debt amid trade frictions with America. After US President Donald Trump threatened steeper tariffs over the pace of trade talks, the yuan plunged the most in more than three years and Chinese stocks fell more than 3.5 per cent on Monday (May 6).

China's largest state-owned banks and national joint-stock banks have until later this year to meet the new requirements, the people said. The CBIRC didn't reply to a fax seeking comment.

The new requirements only apply to corporate loans. The four biggest lenders, including Industrial & Commercial Bank of China Ltd, started adopting the tougher bad-loan recognition last year, said the people. The so-called big four last month reported that they are seeing bad loans grow at the fastest pace since at least 2017.

Chinese lenders are sitting on more than 2 trillion yuan (S$404.7 billion) of soured loans after flooding the financial system with cheap credit for years to prop up economic growth. While more prudent NPL recognition will boost the industry's health over the long run, it may also portend a new wave of bad loans on balance sheets and weaken some banks' capital buffers.

Authorities have taken a stricter stance on dealing with bad-loan issues since early last year, when all lenders were forced to reclassify loans overdue for more than 90 days as non-performing. The move soon led to a record quarterly surge in soured debt and wiped out capital at some small lenders.

Wang Yifeng, chief banking analyst at Everbright Securities Co., estimated that if all loans overdue for more than 60 days were reclassified, the industry's bad loans would increase by 10 per cent, or 200 billion yuan.

The gap between a lender's overdue loans and its reported NPLs has often been used by analysts as one gauge for measuring the accuracy of its asset quality. Outstanding NPLs were near a 15-year high at the end of last year, yet some analysts believe the reported figures understate the problem.

Bad loans may keep piling up as the government pushes banks to lend more to risky small and private businesses to reinvigorate the economy. About 5.8 trillion yuan of new loans were advanced in the first quarter, almost a fifth more than the same period a year ago, official data show. In a survey published last month by China Orient Asset Management Co, one of four state-owned bad-debt managers, respondents said they expect the nation's bad-loan ratio to peak next year.