China’s Banking Regulator Warns of Large-scale Rise in Non-performing Loans Due to COVID-19

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The China Banking and Insurance Regulatory Commission (CBIRC) says that the economic impacts of the COVID-19 pandemic will put greater upwards pressure on non-performing loan (NPL) levels in the second half of 2020.

In an official statement to accompany the release of H1 data on the Chinese banking sector, CBIRC said that “upwards pressure on non-performing assets is expanding,” and preparations are needed for a “potential large-scale rebound.”

“While the increase in the NPL balance on the books hasn’t been pronounced since the start of the year, because there is a significant delay in the financial system’s reflection of economic downtrends, plus the short-term buffering effects of macro-economic policy, the exposure of default risk has been temporarily delayed,” said CBIRC.

“It is forecast that in future NPL’s will continue to manifest and increase.

“As of the end of June the NPL balance and NPL ratios of the reports from various institutions have shown an overall increase compared to the start of the year.

“CBIRC will continually pay close attention to changes in non-performing assets.”

Data from CBIRC indicates that as of the end of June the Chinese banking sector had total assets of 301.5 trillion yuan, for a YoY rise of 9.8%.

In the first half of 2020 renminbi loans increased 12.09 trillion yuan, for an expansion of 2.42 trillion yuan compared to the same period last year.

As of the end of June the NPL balance was 3.6 trillion yuan, for an increase of 400.4 billion yuan compared to the start of the year.

The NPL ratio was 2.10%, for a rise of 0.08 percentage points compared to the start of 2020.

The provision coverage ratio was 178.1%, for a decline of 4 percentage points compared to the start of 2020.

CBIRC pointed to the need for “effective preparations for a possible large-scale rebound in NPL’s,” which will include:

  1. Further effective performance of asset categorisation. “Strict differentiation of enterprises that could suffer difficulties as a result of COVID-19, and enterprises whose intrinsic business risk is comparatively high, and strict confirmation of asset categories for the later in accordance with provisions. Those (assets) that meet NPL standards must be categorised as non-performing.”
  2. Further expansion in disposal capability. “This year the NPL disposal sum will see a rational increase compared to last year’s base, and the resources unleashed by a reduction in the provision coverage ratio must be fully used for disposal of NPL’s.”
  3. Expansion of non-performing asset disposal channels. “Comprehensive use of methods including writing off, clearance, bulk transfer and debt-equity swaps to achieve full disposal of assets that need to be disposed off. Undertaking of trials for the bulk disposal of non-performing assets, and gradual expansion following summary of experiences.”

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