Guangdong and Inner Mongolia can be added to the list of places witnessing a surge in NPLs

The resurgence of bad loans is not only a regional issue but a national problem, an executive at a joint-stock bank says.

The ratio of all but two commercial banks’ non-performing loans (NPLs) to small and medium-sized enterprises hit 2 percent, he said. The exceptions were China Minsheng Bank and Shenzhen Development Bank.

Ratings agency Standard & Poor’s estimates that the figure will increase by two to three percentage points this year as the economic slowdown weighs on corporate balance sheets.

Zhejiang Province’s entrepreneurial hub of Wenzhou has seen a rise of NPLs this year, and the Pearl River Delta, a manufacturing base in the southeast, is also seeing more SMEs default on bank loans.

Many companies in Guangzhou have had difficulty repaying bank loans because “their financial conditions are deteriorating as a result of various factors such as a lack of orders and disruptions to electricity supply,” a risk manager at a major bank said.

The economic growth rates for all but two districts in Guangdong’s capital in the first half of this year fell from the same month last year, a source at the city’s tax bureau said.

The number of NPL at banks in the delta was rising, a client manager at Bank of China said, citing the insolvency of a few real estate projects in Huizhou, which borders Guangzhou.

However, the problems related to the bad loans were temporary and confined to small regions, another senior bank executive noted. They have not yet become a systemic risk to the banking sector and were unlikely to spread immediately to other parts of China, he said.

On average, the percentage of bad loans at all Chinese banks was roughly 1 percent last year. Even if it rises by half, he said, this “is still not high measured against other countries.”

NPLs were also on the rise in an inland region. Banks in Inner Mongolia were having a hard time getting repaid for loans they made. Many were facing pressure related to NPLs as defaults became more common among SME borrowers, a credit manager at a city commercial bank said.

Most SMEs in Inner Mongolia were involved with either coal mining or property development. Those that bet on the latter would lose the most, the credit manager said.

When credit was loose following the central government’s 2008 stimulus policy, many private coal mining companies waded into real estate development, but the tide changed before they could recoup their initial investments, the credit manager said.

Many of these companies were left to rely on high-interest private lending, and they posed the most serious challenge to banks’ risk management, he said.

Coal mining companies, on the other hand, were relatively better off because their profit margins were big enough to absorb the impact of slumping sales, the credit manager said.

If one company could not repay its debt on time, the bank can also help it get bridge loans, he said. If it collapsed, the bank could securitize its assets or liquidate its collateral to cover losses.

Another local banker said that, in general, companies in Inner Mongolia were more willing to borrow and expand businesses than their coastal counterparts. “Most companies and banks still have a lot of wiggle room. What happens next hinges upon whether the government’s stimulus policy can effectively boost confidence.”

By staff reporters Wen Xiu, Tian Lin and Zhao Jingting