Smaller Chinese Banks Step up Risk Reduction, CBIRC to Launch Trials for Accelerated NPL Disposal

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Smaller lenders in China are accelerating efforts to clean up the asset-side of their balance sheets, as financial regulators intensify scrutiny of regional risk.

Data from China Banking and Insurance Regulatory Commission (CBIRC) indicates that in the first half of 2022 small and medium-sized banks in China disposed of a total of 670 billion yuan in non-performing assets, for an increase of 164 billion yuan compared to the same period last year.

A recent meeting of CBIRC has called for “steadily accelerating reform and risk disposal for small and medium-sized banks; strengthening risk prevention and control in key areas, and driving capital supplementation via multiple channels.”

The meeting called for “driving small and medium-sized banks to deepen reform, strengthen risk management and internal controls, and continue to strengthen the ability to service the real economy.”

As part of these efforts, CBIRC said it would further drive smaller Chinese banks to step up risk reduction, with the launch of pilot schemes for the accelerated disposal of non-performing loans (NPLs) across six provinces.

“Trial work will uphold the principles of the market and the rule of law, actively employ the role of local government, firm up the independent responsibilities of small and medium-sized banks, and further expand the intensity of the disposal of non-performing assets,” said a CBIRC official to Financial Times.

Domestic experts said that the move will mark a major step forward for the disposal of the non-performing assets amongst small-scale Chinese banks, with asset management companies expected to play a critical role.

“Financial asset management companies are the market entities for the management and disposal of non-performing assets…they have rich experience in the disposal of non-performing assets and specialised, highly-efficient disposal methods,” said Zhou Maohua, macro-researcher with China Everbright Bank.

“This will help to reduce overall risk in the financial system, and become one of the stabilisers for the financial system.”