Shanghai's bad loan risks 'kept at bay'

CBRC official urges commercial banks to disburse more funds for small firms nationwide

The bad loan ratio in Shanghai will not rise sharply this year although financial risks will continue to emerge, said an official with the local banking regulator.[Special coverage]

"It is impossible for the asset quality of banks in Shanghai to slump broadly, although some individual enterprises may default on loans," said Liao Min, director-general of the Shanghai Office of the China Banking Regulatory Commission, over the weekend.

Shanghai felt the pressure of economic restructuring much earlier than many other places in the nation - in some cases, several years ahead. The nonperforming loan ratio in the Yangtze River Delta increased faster than that in the central and western regions from 2011 to 2013.

But since last year, the rise in the NPL ratio in eastern China has been contained. For example, banks' exposure to steel trade activities in Shanghai dropped from more than 220 billion yuan ($35.14 billion) in 2011 to less than 50 billion yuan this year.

Steel prices may keep falling, but the decline will have a much smaller impact on banks' asset quality, said Liao, who is also a member of the National Committee of the Chinese People's Political Consultative Conference.

At the end of December, the NPL ratio in Shanghai was 0.89 percent, lower than the national average among commercial banks, which stood at 1.25 percent. He estimated that the NPL ratio will increase to about 1 percent this year, still far below the national average.

Small companies are posing more credit risks than large ones. One unidentified commercial bank told Liao that its NPL ratio for small companies in Shanghai is more than 2 percent, while the rate is 1.5 percent for medium-sized companies and about 0.8 percent for large ones. This pattern is similar in many banks.

The CBRC is encouraging commercial banks to offer more financing to micro-sized and small companies by accepting more credit risk, because these companies may become a source of strength in the country's economic restructuring.

As long as a bank's NPL ratio for small companies is less than 2 percentage points above its annual target NPL ratio, its department in charge of small business banking will not be negatively affected by evaluations, the CBRC said on Friday.

In new guidelines on financial services for small businesses, the CBRC told commercial lenders that the number of small companies getting loans should be at least equal with the previous year, and the approval rate for small companies' loan applications should also be at least steady with the previous year.

These targets were added to a previous directive that credit growth to small companies should not be lower than the average growth of various types of credit.

Zhang Jinping, deputy director of the CBRC's financial inclusion affairs department, said: "We now put more emphasis on greater coverage of small companies by bank loans and a larger rate of success for their loan applications. This will complement our country's economic restructuring."

Liao said that the banking regulator could further target the amount of credit by asking banks to increase the number of small firms receiving loans of less than 5 million yuan.

According to his experience, these companies have more difficulty borrowing at low costs than big companies.

He suggested that China learn from the United States and South Korea when it comes to enacting laws that mandate commercial banks support small enterprises or communities with a certain proportion of its loan assets.

Local governments could also form financing guarantee companies that they fund and manage, he said.