China's banks given more room to write off loans to smaller companies

PUBLISHED : Thursday, 23 January, 2014, 1:19am
UPDATED : Thursday, 23 January, 2014, 1:19am

The mainland has issued revised rules to make it easier for banks to write off small loans, in the latest effort to help lenders deal with an expected rise in bad loans as the economy slows.

The rules, issued by the Ministry of Finance and published on the website of Jiangsu's provincial finance bureau on Tuesday, say the aim is to "strengthen financial enterprises' risk prevention and control ability".

Bankers and analysts have warned that non-performing loans in the mainland's banking system are likely to rise this year as a slowing economy, rising interest rates and policymakers' focus on reducing new credit growth are likely to pressure weaker borrowers.

The revised rules grant financial institutions freedom to write off loans to a borrower of up to 10 million yuan (HK$12.8 million) without permission from the regulator, if the loans are to a small or medium-sized enterprise or related to agriculture, and if the lender has tried for at least one year to recover the funds. The upper limit for such write-downs was five million yuan.

The revisions also allow financial institutions to write off personal business loans to a single borrower of up to five million yuan if the institution has sought repayment for at least a year.

The finance ministry also said that if a borrower has entered bankruptcy, financial institutions can write off loans after two years, if they have not received repayment. The previous limit was three years.

Policymakers want to encourage banks to be proactive in writing down non-performing loans as a means of cleaning up their balance sheets and improving the accuracy of their financial statements.

Official data shows the non-performing loan ratio in the mainland's banking system stood at 0.97 per cent at the end of September, but most analysts believe the true ratio is higher.

Banks can use various tactics to avoid recognising bad loans, including extending the maturity of loans or offering new loans to repay old ones.