BEIJING • Some Chinese banks, hit by a surge of troubled borrowing in a weakening economy, are increasingly failing to recognise loans gone sour on their books to avoid having to stump up capital.

Loans to borrowers that have missed a payment are growing three times faster than loans the banks recognise as non-performing, according to their regulatory filings.

An increasingly large chunk of these overdue loans sit on the banks' books at their full value, even when payments have been missed for more than 90 days - the accepted international criterion for classifying loans as non-performing.

This hidden build-up of substandard corporate loans, spurred by China's slowest economic growth in 25 years, flatters the strength of its banks' balance sheets and would hit earnings if the loans were declared in default and written down. "In the past, NPLs (non-performing loans) outnumbered overdue loans," said a China Banking Regulatory Commission (CBRC) official who spoke on condition of anonymity. Now overdue loans are surpassing NPLs."

At 18 listed Chinese banks, overdue loans that had not been written down jumped 57 per cent to 645 billion yuan (S$143.8 billion) in the first half of this year from the end of last year, while NPLs increased 17 per cent to 692 billion yuan, a UBS analysis of Chinese banks' balance sheet data shows. For loans overdue for over three months, the increase was a hefty 166 per cent from the end of last year to 149 billion yuan, a problem that analysts say is more widespread at mid-tier and smaller unlisted Chinese banks.

Downward pressure in the economy was causing Chinese banks to classify loans more flexibly to avoid having to increase the amount of capital they set aside for loan defaults, the CBRC official said.

"The true asset quality of Chinese banks is worse than what appears in the reported NPLs," said bank analyst Ritesh Maheshwari of Standard & Poor's in Singapore.

Bankers are reluctant to take a hit to profits if they believe the loan can be recovered, in full or part. "If an overdue loan is classified as entirely non-performing, then we have to set aside 100 per cent in provisions," said a senior executive at a Chinese bank. "But we may not have 100 per cent of loss. So, it is not reasonable to put aside so much."

REUTERS