Chinese banks must classify corporate loans overdue for more than 60 days as nonperforming, down from 90 days previously. (Photographer: Tomohiro Ohsumi/Bloomberg)

China to Impose Stricter Policy on Bad-Loan Recognition

(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.

China’s regulators are walking a tightrope as they balance the need to keep credit flowing in the face of U.S. trade sanctions with making sure bad debts don’t spiral out of control. While forcing quicker recognition may help ensure banks make better lending decisions, some analysts also cautioned that the move could lead to a spike in non-performing loans.

“For listed banks, the move will increase their NPL balance by about 50 billion to 70 billion yuan,” Wang Yifeng, chief banking analyst at Everbright Securities Co. in Beijing, said by phone. “This is a prudent act. The regulator wants to ensure that banks can have bad credit exposed as early as possible and make up the shortfall in a bumper year.”

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.

China to Impose Stricter Policy on Bad-Loan Recognition

Two tweets by U.S. President Donald Trump threatening steeper tariffs were enough to send the yuan plunging by its most since 2016 and roiled China’s stock market on Monday. Chinese authorities are considering delaying the next round of trade talks, according to people familiar with the matter.

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 ($295 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.

What Bloomberg Intelligence Says

“I expect continuous, sizable increases in provision charges at the banks for the rest of year. The CBIRC has been asking for this as it wants the sector to better reflect their actual asset quality -- with more loan risks ahead amid a protracted trade war and economic slowdown -- so the regulator can make better policy decisions going forward.”

--Francis Chan, banking analyst

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.

©2019 Bloomberg L.P.