China banks get flexible with how overdue loans are classed

Some Chinese banks, hit by a surge of troubled borrowing in a weakening economy, are increasingly failing to recognise loans gone sour on their books to avoid having to increase capital.

Loans to borrowers that have missed a payment are growing three times faster than loans the banks recognise as non-performing, according to their regulatory filings.

An increasingly large chunk of these overdue loans sit on the banks’ books at their full value, even when payments have been missed for more than 90 days – the accepted international criteria for classifying loans as non-performing.

This hidden build-up of substandard corporate loans, spurred by China’s slowest economic growth in 25 years, flatters the strength of its banks’ balance sheets and would hit earnings if the loans were declared in default and written down.

“In the past, NPLs outnumbered overdue loans,” said an official at the China Banking Regulatory Commission, who spoke on condition of anonymity. “Now overdue loans are surpassing NPLs.”

At 18 listed Chinese banks, overdue loans that had not been written down jumped 57 per cent to 645 billion yuan in the first half of this year from the end of last year, while NPLs increased 17 per cent to 692 billion yuan, a UBS analysis of Chinese banks’ balance sheet data shows.