The non-performing loans (NPL’s) of Chinese banks saw a sharp surge in the second quarter following the launch of new rules for categorising soured debt.
NPL’s posted an increase of 183 billion yuan (approx. USD$26.6 billion) by the end of June to reach 1.96 trillion yuan in total, for the largest quarterly rise in over a decade according to a statement released by the China Banking and Insurance Regulatory Commission (CBIRC) on Monday.
Dud loans as a share of total advances hit their highest level since March 2009 at 1.86%.
While China’s ongoing deleveraging drive and shadow banking crackdown have led to tighter liquidity conditions, analysts point to new rules forcing Chinese banks to categorise all loans overdue for more than 90 days as NPL’s as a key factor behind the spike.
Rural commercial banks, who are particularly vulnerable to the adverse conditions created by China’s ongoing deleveraging drive as well as the launch of new asset management regulations, accounted for around 80% of the increase in NPL’s last quarter.
The sharp NPL increase nonetheless took some observers by surprise.
“The NPL data is much worse than we had expected,” said Zhao Yarui, Shanghai-based analyst at Bank of Communications, to Bloomberg.
“Tighter liquidity in the first half has certainly contributed to quick deterioration in banks’ asset quality, along with stricter policy on bad loan recognition.”
Despite the sharp rise in NPL’s the total profits of the Chinese banking sector posted a 6.4% rise in the first half on the back of healthier margins to hit 1 trillion yuan.
Beijing is now pushing for greater credit extension as Sino-US trade tensions threaten to hamper economic growth, with the Chinese central bank describing monetary policy settings “rationally ample” and CBIRC calling for commercial banks to lend more.