Experts have applauded a pilot debt-to-equity swap plan that would allow banks to convert bad loans into equities in the borrowing enterprise, while they said banks need to be more prudent when managing risks.
The plan, which may be approved by the end of this month, may allow the conversion of 1 trillion yuan ($154.6 billion) in bad loans, reported Bloomberg on Tuesday.
A research note from Xiangcai Securities Co said the swap plan would bring about a win-win situation in which borrowing enterprises are lifted from financial difficulties and recover, helping lenders to reduce bad loan ratio.
Bad loans in China's banking sector soared 51 percent in 2015 to 1.27 trillion yuan, the highest level in a decade, according to data from the China Banking Regulatory Commission.
Most of businesses that are likely to be included in the plan are from particular sectors, including mining, steelmaking and nonferrous metals, which have been suffering from downward pressure and overcapacity.
These enterprises, which have been making losses in the past few years and could be unable to repay debts in due time, may be given a second chance to recover as fundamentals improve, the report said.
For lenders, the swap plan may reduce the banking industry's nonperforming loan ratio by one percentage point and may lift banks' annual net profit by an average of four percentage points, according to research note by Huatai Securities Co.
However, whether the goal of the plan will be achieved depends on the actual operation and performance of the borrowing enterprises, said researchers.
"In good cases, borrowing enterprises may return to the black and the bad loans become good equities for lenders. In bad cases, enterprises may not successfully recover from the financial difficulties, and the bad loans become bad equities for lenders, which will dent lenders' profits and hurt shareholders' returns," said a research note from Orient Securities Co.
Sun Lijian, a professor at Fudan University, said long-term expectations of commercial banks' prosperity have been affected as concerns rise over asset quality, according to a report from the China Economic Panel Indicator by the Financial Research Center of Fudan University, a joint project between Fudan University and ZEW, a German-based center for economic research.
Wang Zhongmin, vice-president of the National Council for Social Security Fund and an expert on asset management, said: "The financial market needs more tools and channels to deal with risks including moral hazards."
