Monday, January 12, 2009

Well, the day we've been waiting for is here. Banks are now formally told to forget about NPL ratios. Results? Rising NPLs......

China to Tolerate Increase in Bad Loans, Relax Lending Rules
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By Philip Lagerkranser

Jan. 12 (Bloomberg) -- China will tolerate an increase in bad debt this year as it eases rules governing bank lending to prop up an economy that’s slowing faster than expected, the nation’s banking regulator said.

The China Banking Regulatory Commission will drop its target of reducing the balance and ratio of bad loans after five years of declines, and instead aim to prevent a “massive and rapid rebound” in soured debts, Chairman Liu Mingkang said in Beijing today. A transcript of his speech was obtained by Bloomberg News.

Looser requirements may fuel concerns about a surge in bad loans, four years after China finished a cleanup of its banking system that cost more than $500 billion. Lenders will likely face weakening asset quality, rising defaults and “significant” constraints on profits in 2009, Standard & Poor’s said Jan. 7.

“What we’re concerned about is whether banks will, under government interference, boost lending without properly recognizing the risks,” said Liao Qiang, the rating company’s Beijing-based analyst, in an interview. “Governments tend to relax prudential regulatory requirements in difficult times. The key is how banks” react.

Measures to boost credit include allowing banks to lend to businesses afflicted by “temporary” financial woes due to the global recession but with sound fundamentals, Liu said. Lenders can also “restructure” loans and “scientifically” adjust the types and maturities of debt, and the regulator will support the sale and securitization of loans, he said without elaborating.

‘Arduous Task’

Industrial & Commercial Bank of China Ltd., the world’s largest bank by market value, and competitors have said they’ll increase lending as part of the government’s $590 billion stimulus package, announced in November. China’s biggest banks are all state-controlled.

Chinese banks extended 740 billion yuan ($108 billion) of new loans in December, the most since January 2008, the Shanghai Securities News reported today, citing unidentified people.

The CBRC encourages lending to fund small and medium-sized businesses, mergers and acquisitions among large companies, as well as credit for automobile and home appliance purchases, according to the transcript.

“The downside risk to the Chinese economy is even worse than anticipated,” Liu, 62, said in the speech. “The 8 percent growth target is of great importance, but an exceptionally arduous task.” Liu last month said expansion of 7 percent or less could trigger social instability.

China’s economy will expand 7.5 percent this year, the slowest pace in almost two decades, as the global financial crisis worsens, the World Bank predicts. Exports probably fell the most in a decade in December even after the government increased rebates, pledged more export loans and stalled currency gains, according to economists surveyed by Bloomberg News.

Funding Channels

The regulator will have “reasonable tolerance” for rising bad loans, Liu said. Shrinking corporate profits and interference by local governments have “seriously” reduced borrowers’ willingness to repay debts, he added. Banks cut their average bad-loan ratio to 5.49 percent at the end of September, from 6.3 percent six months earlier.

Still, the CBRC will “strictly” ban companies from taking up new project loans to repay existing ones, and prohibit bundling of non-performing assets into securities, according to the transcript. Banks aren’t allowed lend to production projects before the investors get relevant approvals, Liu said.

The regulator will also broaden the channels for banks to boost capital and urge them to increase provisions, Liu said without being more specific.

The banking regulator on Jan. 10 said it would “allow qualified small and medium-sized banks to moderately exceed the loan-to-deposit requirement.” Chinese lenders are required to keep outstanding loans below 75 percent of their deposits.

All the more fodder for their new restructuring law.
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