China’s central bank investigates bad loan data at banks

China's central bank is investigating the accuracy of non-performing loans (NPLs) data at banks, people with direct knowledge of the matter told Reuters on Monday.

The development underlines policymakers’ concerns about rising debt in the country.

Specifically, the central bank’s financial stability bureau is investigating whether any NPLs have been miscategorised as normal loans or special mention loans, referring to debt at risk of default, according to two sources who saw a central bank notice on the issue.

The probe comes as slowing economic growth raises regulatory concerns that banks are increasingly covering up their NPLs to dress up their balance sheets, said one of the sources.

The build-up of bad debts, which have increased for 18 consecutive quarters, follows the state-driven credit boom of 2009 and has so far shown no signs of slowing.

The People's Bank of China (PBOC) is looking into whether banks' asset quality is appropriately categorised and if there is interference from local governments in banks' lending and refinancing decisions, another source said.

Political interference is particularly difficult for policy banks, which are responsible for state-directed lending, the source said, as much of their lending is tied to government-backed entities such as local government financial vehicles or public infrastructure projects.

The central bank is also checking to see if troubled assets have been secretly moved off-balance sheet and if loan repayment schedules are reasonable, the source added.

Local offices of the PBOC will conduct spot checks and on-site investigation, and issue evaluation reports, the source said.

Chinese commercial bank NPLs rose to an 11-year-high of 1.4 trillion yuan ($214.5 billion), or 1.75 per cent of total bank lending, at the end of March, data from the country’s banking regulator showed last week.

Adding the additional 3.2 trillion yuan of special-mention loans, the banking sector’s total troubled lending reached 4.6 trillion yuan at end-March, a jump of 428 billion yuan from December, the data showed.

Bank analysts widely believe NPLs in China’s banking sector are far more severe than official data suggests, as some banks delay loan recognition and use off-balance sheet lending to hide bad debts.

In a report this month, CLSA said NPLs may account for 15 to 19 per cent of loans.

The PBOC declined to immediately comment on the investigation when contacted by Reuters.

Earlier this month, China’s People’s Daily, the ruling Communist Party’s official newspaper, published a column quoting an unnamed “authoritative person” saying regulators needed to investigate financial market risks and prepare contingency plans.

The “authoritative person” also said banks should neither conceal nor delay reporting of their bad debts.

This year the central bank introduced a new regulatory system, the Macro-Prudential Assessment (MPA), to more effectively guard against systemic financial risks as the country’s banking assets become more diversified.

Reuters