Banks urged to amplify loan loss provisions

Regulator asks financial institutions to step up bad debt disposal efforts

China has urged banks to amplify loan loss provisions, consolidate capital strength and cut dividend payments, to improve their ability to fight against financial risks amid the COVID-19 epidemic.

"We must be well-prepared for a possible large rebound in nonperforming loans," said a spokesperson of the China Banking and Insurance Regulatory Commission over the weekend.

The exposure of default risk has been delayed temporarily because there is a time lag between the economic downturn and its reflection in the financial sector, and also because China's macroeconomic policies have risk hedging effects in the short term, said the spokesperson who expects to see a rise in NPLs, which are not yet fully exposed.

"One of our current priorities is to cooperate with the provincial government on making the implementation plan for the issuance of special-purpose bonds to replenish the capital of small and medium-sized banks. We will improve their risk resistance capacity and credit issuance capacity through capital consolidation."

Some banks, companies and local governments are unwilling to expose their NPLs or even try to conceal bad debt. The CBIRC urged banking institutions to truthfully classify assets into different categories and strictly distinguish the companies that face temporary hardships due to the novel coronavirus outbreak from those companies that have high operational risks. Loans that meet regulatory requirements for nonperforming loans must be classified as nonperforming.

"Banks should not loosen requirements for credit approval or hide their nonperforming assets. On the contrary, it is particularly important to reveal the real conditions of their NPAs at this moment," said Dong Ximiao, chief research fellow at XWBank, an online-only bank based in Sichuan province.

As provision coverage ratios of some banks are currently lower than 100 percent, Dong advised banks to make sufficient loan loss provisions.

By the end of June, the outstanding balance of NPLs of China's commercial banks was 3.6 trillion yuan ($514.4 billion), increasing by 400.4 billion yuan from the beginning of this year. During the same period, the NPL ratio rose by 0.08 percentage point to 2.1 percent, and the provision coverage ratio fell by 4 percentage points to 178.1 percent, according to the CBIRC.

The regulator has urged banking institutions to step up efforts to dispose of NPLs and further expand channels for NPL disposal. It will launch a pilot program allowing banks to transfer nonperforming personal loans, including consumer loans, home mortgage loans and credit card overdrafts, in a batch to asset management companies.

Banking institutions are also required to reasonably increase the value of NPLs that are disposed of this year based on the value of NPLs last year and use all the credit resources released by the lowering of provision coverage ratios to deal with bad debt.

"There is a lot of work to be done to enlarge the scope and lower the threshold of nonperforming assets disposal by easing relevant policies," said Zeng Gang, deputy director-general of the National Institution for Finance and Development.

Some small and medium-sized financial institutions have relatively serious problems as their corporate governance mechanisms fail to work properly. Their asset quality has worsened more rapidly since they were stricken by the epidemic, the CBIRC spokesperson said.

As some small and medium-sized banks face relatively high pressure of NPLs, Zeng said it is necessary for the government to help them replenish capital while pushing forward reforms on small and medium-sized banks to mitigate risks and improve their competitiveness through mergers and acquisitions.