June 25th, 2012 | Caixin Banking Sector Sees Rise in Bad Loans
Wenzhou has witnessed a worrying resurgence of NPLs, which some fear could become a nationwide problem
The amount and ratio of non-performing loans (NPLs) in the banking sector are increasing after steadily dropping for years as major state-owned banks finished share ownership reform and went public in the early 2000s.
By late 2011, the NPL ratio for the entire banking industry stood at less than 1 percent, and while there was general agreement the figure could rise, analysts thought the change would unfold slowly.
However, it is already taking place in Wenzhou, in the eastern province of Zhejiang. The city frequently made headlines last year because private financing went off the rails as credit tightened and speculative property sales slumped.
“When Premier Wen Jiabao paid a visit to Wenzhou last August, the city’s non-performing loan ratio in the banking sector was only 0.37 percent, the lowest in the nation,” an official with China Banking Regulatory Commission’s Zhejiang office said. “Now it has risen to nearly 2 percent.”
By April, the amount and rate of NPLs at the province’s state-owned banks had grown, several sources in banking industry said.
Leading the uptick was China Construction Bank’s provincial branch. The bank saw its NPL ratio rise to 2 percent and the total amount of outstanding NPLs reached 10 billion yuan, an official from the bank said.
The local branches of large, joint-stock commercial banks were hit as well.
The NPL ratio of China Guangfa Bank in Zhejiang rose to 2.89 percent, up by more than 1 percentage point from the end of last year, the banking regulator said.
Shenzhen Development Bank also saw its ratio nearly double to 2 percent, the data shows.
In general, the NPL ratio in the Zhejiang banking industry had risen by at least 0.5 percentage points by May from 0.93 percent early in the year, an official with the Zhejiang branch of Industrial and Commercial Bank of China said.
“Zhejiang could be a prelude,” he said, “We’re concerned that this would spread to the eastern region as a whole, followed by central and western regions.”
This year, “the amount and rate of non-performing loans in the Chinese banking industry may very well rise together,” he said.
“The problem of business owners fleeing has not been contained and is still the most important reason for the increase in non-performing loans,” a Wenzhou Banking Regulatory Bureau official said at the city’s financial work conference in March. Bad loans resulting from business owners fleeing accounted for nearly 40 percent of NPLs locally, he said.
Some people familiar with the situation also tied the increase to regulatory consolidation of local private financing networks.
Before 2011, business owners in Zhejiang had been used to borrowing from the private lending network to repay bank loans if their operating revenues did not catch up, an official with the central bank’s Wenzhou branch said.
However, it has become increasingly difficult for them to do so since the central government tightened private financing regulations last year, he said.
Indeed, the size of private financing in Wenzhou has dropped by about 30 percent from last August, with the amount of individual-to-individual loans and individual-to-enterprise loans more than halved, a recent survey by the local financial regulator found.
Meanwhile, private financing interest rates have fallen as well. Data from the central bank’s Wenzhou branch showed that in April the interest rate of private lending in the city was 21.58 percent, down by more than 3 percentage points from the same month a year earlier.
In addition, the cooling economy has contributed to the shrinking value of many bank loans’ underlying collateral, an official with ICBC’s Zhejiang office said. The recent surge in the number of companies going bankrupt has also obstructed banks’ efforts to dispose of assets to cover losses when a company defaults on its loans, he said.
In wake of the rapid growth of NPLs, Caixin learned that CCB’s Zhejiang branch has retracted loan approval authority from its sub-branches.
Many executives at the bank blamed the macro economy for the problems.
Local bankers said Zhejiang’s private economy relied too much on exports and was too vulnerable to macro-economic volatility.
Banks needed to improve their risk management capabilities as well, a local banking regulator said.
Most Chinese banks still live at the mercy of macro trends, he said. With its performance determined by the status of economy, a better or a worse balance sheet says little about a bank’s management capabilities, he said.
By staff reporters Zhang Yuzhe, Zhang Bing, Shen Hu, Wen Xiu and Zheng Fei