Mainland banks should be watchful of running up further bad debts while boosting loans to help stimulate the economy, Premier Wen Jiabao told bank employees in London over the weekend. Mr Wen stressed the importance of maintaining prudent lending criteria against a background of increased loan growth since November last year in response to Beijing's appeal for lenders to help counter the effects of the global financial crisis on the country's economic growth. 'We must ensure asset quality and enhance supervision. It would be too late to toughen supervision when problems actually arise,' Mr Wen told employees of the London operations of mainland financial institutions on Saturday. 'We must not lend to facilitate duplicated or excessive capacity. Banks should implement a loose monetary policy. 'Also, they should well grasp the principle of lending, preventing new loans from turning into bad assets in the future.' Banks extended loans totalling 900 billion yuan (HK$1.02 trillion) in the first 20 days of January, compared with total lending of about 700 billion yuan in the previous month and just 400 billion yuan in November, Mr Wen told the World Economic Forum in Davos, Switzerland last week. He hailed the expanded lending as a sign of economic recovery, although analysts warned it may be too early to be optimistic. 'Loan growth was inflated due to a sharp increase in discounted bills, the shift of off-balance-sheet loans to on-balance sheet assets, and the rush to cherry-pick the government infrastructure projects launched,' said Alistair Scarff, an analyst with Merrill Lynch. The central government announced a 4 trillion yuan economic stimulus scheme in November last year as it called on banks and companies to co-finance projects to improve infrastructure across the country. Unlike its foreign counterparts, the central government would not spend the money on mending banks' balance sheets. Instead, it would go to the real economy and subsidise consumer spending, Mr Wen said. With non-performing loan ratios down to just 2.5 per cent at some key lenders, mainland banks are regarded as generally sound and have been a huge boost in combatting the global financial crisis, he said. The bad-loan ratio in mainland banks fell to 2.45 per cent at the end of last year from 6.16 per cent a year ago, according to the China Banking Regulatory Commission. However, the decline was mainly due to the write-off of 750 billion yuan of non-performing loans by Agricultural Bank of China and 9.4 billion yuan of write-offs at Shenzhen Development Bank. 'Excluding the distortion, we estimate the [non-performing loan] formation in the sector was high at 80 to 125 basis points, worse than our expectations,' Mr Scarff said. The analyst believes new non-performing loan formation gathered momentum last month across the Asia-Pacific. Against this background, Mr Wen told the London bank employees to 'closely watch' developments in international financial markets and 'analyse the possible influences' to the country at a time 'when the trend of financial crisis is still obscure'.