New financing channels 'pose risk to banks'

Risks from "nonstandard" financing channels such as private lending, illegal fund-raising and unregulated Internet finance activities could spill over to the banking sector, China Banking Regulatory Commission Chairman Shang Fulin said on Tuesday.

Addressing the China Banking Association in Beijing, Shang said that the CBA should promote the transformation of the banking sector's risk prevention and control models.

"The traditional passive, one-dimensional measures of risk control cannot satisfy the sector's new requirements, because domestic banks are participating in the broader trend of becoming conglomerates and developing diversified, integrated operations during a time of national economic downturn and restructuring," Shang said.

To adapt to the situation, he said the CBA must improve the sector's risk management practices.

He warned that risks from new and unconventional financing activities may spread to traditional banks.

"We found that most of the companies that defaulted and whose executives had fled to escape possible physical retaliation had borrowed from private lenders. When the executives fled, they left behind outstanding bank debt as well. To handle major risks faced by the banking sector, the CBA must conduct thorough research into private and bank lending, formulate crisis response plans, build a firewall to prevent the spread of shadow banking risks and make risk management more proactive," he said.

The CBRC will announce guidelines to improve the management and regulation of off-balance-sheet items, especially those involving activities such as entrusted loans, which surged in recent months.

Banks have developed many off-balance-sheet businesses to evade regulations.

The asset quality of many commercial banks weakened in the first half of this year under the pressure of a slowing economy. Statistics from the CBRC showed that commercial banks' nonperforming loans stood at 694.4 billion yuan ($113 billion) as of June 30, with an average NPL ratio of 1.08 percent.

The five largest State-owned lenders had 423.49 billion yuan in bad loans on June 30 this year, up 49.18 billion yuan from Dec 31, 2013. Their average NPL ratio went up 5 basis points to 1.08 percent.

The bad loan problem has expanded from its former epicenter in the Yangtze River Delta to wider areas such as the Bohai coastal region in northern China, the Pearl River Delta region and the western region.

Lian Ping, chief economist of the Bank of Communications Co, said that commercial banks' bad loans will continue to increase for at least six to nine months, and NPL ratios are likely to climb to a range of 1.14 percent to 1.19 percent by the end of this year.