High NPLs may plague mainland banks for decade

Thomas Au Yeung,Special to The China Post

In a commentary report released yesterday, Standard & Poor’s said that despite the fact that Chinese banks have significantly improved their credit and risk management controls in recent years, high levels of non-performing loans (NPL) could continue to plague the banking system in mainland China for as much as twenty years unless there is government intervention. “We estimate that without government support, the banking sector in the mainland will need at least 10 years and possibly as many as 20 to reduce its average NPL ratio to a more manageable 5%,” said Terry Chan, S&P’s director of Financial Services in Hong Kong. Chan added that the write-offs could be equivalent to US$518 billion, which is nearly “half of China’s estimated gross domestic product of US$1.1 trillion for 2001.” The report also said that the “Big Four” state-owned commercial banks, in light of the poor operating environment of the wider banking sector, are unlikely to reduce their NPL ratio to the 15% requested by the central bank, the People’s Bank of China within five years.

To reduce levels of NPLs to the level sought by government authorities would require specific intervention, either in the form of capital infusion or through a transferring of NPLs to asset management companies owned by the government’s Ministry of Finance. The commentary report, “China Banks Face Decade of Problem Loans Unless More Equity Injected,” can be found on S&P’s web-based credit analysis system, RatingsDirect.