China Urges Banks to Step Up Risk Controls as Bad Loans Increase

  • Ratio of nonperforming debts climbed to 1.81% in June
  • Regulator plans to expand NPL-backed securitization program

China’s banking regulator required banks to step up risk controls and safeguard financial stability as the nation’s soured debt rose.

Banks’ nonperforming loans climbed to 1.81 percent of outstanding credit as of June 30 from 1.75 percent three months earlier, the China Banking Regulatory Commission said in a statement on Friday. While the CBRC said the banking industry’s capital adequacy and provision levels are still “relatively sufficient," it urged the lenders to raise capital to enhance their loss-absorbing and risk-management ability.

Chinese lenders are grappling with a growing mountain of bad debt after flooding the financial system with cheap credit for years to prop up economic growth. The official figures of 1.39 trillion yuan ($208 billion) as of March are widely believed to understate the true scale of the problem, with CLSA Ltd. estimating nonperforming loans were probably closer to 11.4 trillion yuan at the end of last year.

The industry’s bad-loan coverage ratio, a measure of its ability to absorb potential losses from soured credit, weakened to 161 percent from 175 percent in March, the statement showed, signaling a drag on future profits from the need to set aside additional reserves. The minimum required level is 150 percent.

Raise Capital

Nine of 15 respondents in a Bloomberg survey at the end of last month, including Standard Chartered Plc and Commonwealth Bank of Australia, predicted a government-funded recapitalization of lenders will take place within two years. Among those who provided estimates of the cost, a majority said it will exceed $500 billion.

The regulator told banks to focus on reduce risks on liquidity, the cross-holding of financial products, compliance in their overseas operations, and illicit fundraising from the public, adding that it will start a full-scale campaign to scrutinize risk management at the lenders.

As part of the efforts to deal with rising bad loans, the banking regulator said it is seeking to expand the program that lets banks issue securities backed by their nonperforming loans, without elaborating. So far, lenders including Bank of China Ltd. have taken part.

China approved an initial quota of 50 billion yuan of NPL-backed securities for the largest banks, people familiar with the matter said in February.

— With assistance by Jun Luo

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