China could face decade-high bad loan ratio as coronavirus slams small businesses, DBS says

China’s banking system could be saddled with the highest non-performing loan ratio in more than a decade after authorities loosened the repayment rules for small businesses hardest hit by the coronavirus outbreak, according to DBS Group.

The NPL ratio is likely to head toward the 2 per cent this year, a level not seen since the first quarter of 2009, according to Cindy Wang, associate research director at Singapore’s biggest banking group. The proportion of soured loans has risen in the past two years to 1.86 per cent in 2019, based on official data.

The People’s Bank of China this week asked its lenders to offer the nation’s small and medium-sized businesses and micro enterprises a grace period on their debt repayment obligations to counter the coronavirus impact. The relief, for both the principal and interest, is for up to June 30.

“We expect an increase in special-mention loans during the first half,” said Wang, who is based in Hong Kong. “For the second half, banks’ NPL will pick up, with smaller city and rural commercial banks being the worst hit compared to other state-owned commercial banks.”

Special-mention loans are borrowings deemed at risk of turning sour. Chinese lenders generally classify loans as bad after they are 60 days past due. Wang expects the overall NPL ratio to reach 2 per cent by year-end.

The PBOC announcement on Monday follows the biggest public health crisis in decades caused by the viral outbreak that started in Wuhan in the central Hubei province. The government has locked down many cities while companies shut down production facilities to help contain the virus.