China's central bank is preparing regulations that would allow commercial lenders to swap nonperforming loans (NPLs) of companies for stakes in those firms, two people with direct knowledge of the new policy told Reuters.
The sources, who spoke on condition of anonymity, said the release of a new document explaining the regulatory change was imminent.
NPLs surged in 2015 as China's economy grew at its slowest pace in a quarter of a century.
Official data from the China Banking Regulatory Commission showed banks held NPLs and "special mention" loans, or debts that could potentially turn sour, in excess of 4 trillion yuan ($614 billion) at the end of 2015.
The new regulations would reduce NPL ratios at commercial banks, requiring them to set aside less cash to cover losses incurred by bad loans.
Funds could then be freed up for fresh lending for investment in a new wave of infrastructure products and factory upgrades that the government hopes will rejuvenate the economy.
The quality of assets held by banks is worse than it looks, analysts have said.
To avoid stumping up capital and to protect their balance sheets, some Chinese banks have under-reported bad loans and under-recognized overdue debt, they say.
