China NPLs could rise in 2-3 years

BEIJING: Chinese banks' non-performing loan (NPL) ratio could start to rise in two to three years as some of the flood of loans extended in the first half of this year start to turn sour, an industry official said on Tuesday.


Yang Zaiping, executive vice president of the China Banking Association, also said at the Reuters China Investment Summit that he hoped new rules governing banks' capital would be implemented in a gradual way. Those rules would exclude from banks' capital base the subordinated bonds sold to other banks.


Heeding Beijing's call to step up lending in support of the economy, Chinese banks granted a record 7.4 trillion yuan (RM3.82 trillion) in new loans in the first six months of the year, or about one-quarter of the country's annual gross domestic product.


Much of that credit was given out based on relatively lax criteria, presenting the possibility of a rise in the NPL ratio as some of those investments go bad, said Yang.


"We estimate that it may rise by one to two percentage points," he told the summit at the Reuters office in Beijing. "But, of course, we will seek to keep it from rising."


Banks' NPL ratio fell to 1.77% at the end of June from 2.04% at the end of March, largely reflecting the big increase in overall lending.


Yang played down concerns that a drop in lending in the second half of the year will dent economic growth, even though those worries have been one of the reasons for the 23% fall in Shanghai's share index from its peak hit on Aug 4.


Lending slowed considerably in July and August after regulators, worried about NPLs and asset bubbles, leaned on banks to rein in credit growth and drafted rules to tighten their capital requirements.


Lending tends to be bunched in the first part of the year in any case, Yang noted.


Banks also would seek to assure their lending in the rest of the year was more targeted at quality projects, he said.


"We extended many loans in the first half, but a considerable amount of the new loans did not reach the real economy," he said.


"Banks should not simply lend randomly; instead, they need to extend credit selectively to effectively support the economy."


Addressing the tighter capital requirements, Yang said he thought it best if banks were allowed to gradually adjust to the rules, allowing them to count some of their subordinated debt as part of their capital base initially.


"I think banks will prefer to lend in a more cautious way rather than seek to raise more capital, because that would take a longer time," he said, commenting on the likely manner in which banks would comply with the new rules. — Reuters