Bad Loans on the Rise at Small Chinese Lenders – Report

Central government efforts to reduce excess capacity has put pressure on local economies and firms’ ability to repay debt; thirteen banks have had their credit ratings cut or outlooks downgraded, according to analysis by Reuters.

Small banks in China have are seeing a rise in NPLs (non-performing loans) as the government looks to reduce excess industrial capacity and reduce pollution, according to a report by Reuters.

Quoting research by credit ratings agencies, Reuters reported that some small lenders in provinces like Henan and Guizhou have seen their capital adequacy ratios fall to near zero or negative due to increasing bad loans. Overall bad loan growth in China has slowed this year due to faster profit at the big state-run banks.

Reuters found, through an analysis of 271 reports by domestic ratings agencies, that at least thirteen banks, including ten rural commercial banks, have had their credit ratings cut or outlooks downgraded to negative since the start of 2017.

The rise of bad loans are reportedly due to small business failures due to slowing local economies which in turn are impacted by the closure of factories and mines due to the central government’s campaign to slash excess capacity and curb pollution.

The NPL ratio of one bank, Shandong Guangrao Rural Commercial Bank, jumped from 2.47 percent in 2016 to 13.9 percent at the end of 2017, while annual profit dropped 99 percent from CNY 197 million to CNY 1 million over the same period.

Small banks are scrambling to replenish capital reserves and raise additional funds to provision for NPLs. The report quoted Xu Chengyuan, the chief analyst at Golden Credit Rating International Co., as saying that shrinking credit due to rising bad loans could have “serious implications” for local economies.

The rise in bad loans can also be attributed to stricter rules on classifying bad loans, according to Golden Credit Rating. Small banks had been hiding them under the “special mention” category.

Guizhou, Henan, Liaoning, Shandong and Jilin reportedly have the highest NPL ratios in China.

“But risks could spread to more regions if companies are increasingly hit by Beijing’s financial deleveraging campaign, which has pushed up borrowing costs and reduced credit availability,” said the Reuters report.

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