China Clamps Down on Tool for Banks to Report Lower Bad Loans

China is clamping down on a tool that banks can use to report lower levels of bad loans and therefore make fewer provisions for them.

The China Banking Regulatory Commission is requiring lenders to provision for nonperforming loans even when they have transferred rights over the credit to other financial institutions, people familiar with the matter told Bloomberg News last week. The CBRC told lenders in a notice that it wanted more transparency in the loan-beneficiary rights transfer business, said the people, asking not to be identified as they are not authorized to speak publicly.

No comment was immediately available from the CBRC on Tuesday.

“Banks’ balance sheets will more truly reflect their credit exposures,” said Shujin Chen, a banking analyst at DBS Vickers Hong Kong Ltd.

Chinese banks are grappling with surging bad loans as an economic slowdown and government measures to curb overcapacity in manufacturing trigger company defaults. In order to preserve their profits, lenders such as Industrial & Commercial Bank of China Ltd. and Bank of China Ltd. have already breached regulatory requirements for bad-loan provision coverage. 

Another Twist

The latest move from the regulator comes as analysts and officials struggle with establishing lenders’ true credit exposures. In another twist, lenders have increasingly used trusts or asset-management plans to lend, recording the money as funds to be received rather than as loans, which are subject to stricter regulatory oversight and capital limits.

The CBRC’s guidance also said that banks’ wealth-management products can’t invest in loan-beneficiary rights sold by those same banks, the people said. In addition, neither wealth management products nor trust products sold to individual investors can invest in bad-loan rights, they said.

The latest rules, and the extra provisioning requirements that may follow for some banks, highlight lenders’ calls for the bad-loan coverage ratio -- now standing at 150 percent of existing nonperforming debt -- to be relaxed to a lower level. Officials have been considering such a move.