Bankers con­cerned over credit risks of SMEs

China Daily (Hong Kong) - - BUSINESS / CHINA - By WU YIYAO in Shang­hai wuyiyao@chi­

Chi­nese bankers are con­cerned about credit risks con­nected to en­ter­prises that are af­fected by the na­tion­wide cam­paigns to elim­i­nate out­dated in­dus­trial ca­pac­ity and curb lo­cal govern­ment fi­nanc­ing ve­hi­cles, said a re­port re­leased on Mon­day.

The re­port, based on a sur­vey by the Chi­nese Bank­ing As­so­ci­a­tion and Price­wa­ter­house Coop­ers, which polled 1,604 bankers across 31 prov­inces and mu­nic­i­pal­i­ties, said 54.5 per­cent of the sur­veyed bankers said they be­lieve ad­just­ing the na­tion’s in­dus­trial struc­tures may in­crease credit risks to China’s bank­ing sys­tem.

Also, 31.6 per­cent said they be­lieve that non­per­form­ing loan risks are most likely to in­volve mi­cro-sized and small en­ter­prise loans. Among the bankers, 61.3 per­cent said the Yangtze River Delta is most likely to face the pres­sure of in­creas­ing NPLS, since the re­gion is host to mi­cro-sized and small com­pany en­ter­prise hubs, which face sys­temic risks.

Mar­ket in­sid­ers said loans to mi­cro- sized and small en­ter­prises have been in­creas­ingly dis­puted in the bank­ing in­dus­try. While some lenders think such loans may of­fer new growth op­por­tu­ni­ties, oth­ers have shunned ap­pli­ca­tions for such loans.

“Lead­ers of banks are torn over the risks of loans” to smaller com­pa­nies, said a source with a Shang­hai-based, State-owned bank.

On the one hand, govern­ments at var­i­ous lev­els en­cour­age sup­port from the fi­nan­cial sec­tor to small en­ter­prises to help them grow, and such loans may in­deed help them out dur­ing hard times.

On the other hand, it is quite risky to make loans un­der cur­rent con­di­tions. In many cases, the ap­pli­cants do not have guar­an­tees, and they are seek­ing un­se­cured loans, said the source, who de­clined to be iden­ti­fied due to the sen­si­tiv­ity of the mat­ter.

NPLs have been ris­ing in re­cent months, and they climbed by the largest amount in the third quar­ter, ac­cord­ing to data from the China Bank­ing Reg­u­la­tory Com­mis­sion.

Bad bank loans out­stand­ing in­creased by 24.1 bil­lion yuan ($3.96 bil­lion) to 563 bil­lion yuan at the end of Septem­ber. But due to swift over­all loan growth in the third quar­ter, Chi­nese banks’ NPL ra­tios ticked up only slightly.

The sys­tem-wide NPL ra­tio reached 0.97 per­cent, com­pared with 0.96 per­cent at the end of June, the com­mis­sion said.

About 43 per­cent of polled bankers said they have been closely watch­ing the risks ex­posed to debts of lo­cal govern­ment fi­nanc­ing ve­hi­cles.

On Dec 10, the cen­tral govern­ment an­nounced that the per­for­mance eval­u­a­tion of lo­cal govern­ment of­fi­cials will no longer be based pri­mar­ily on eco­nomic growth, but rather on sound fi­nan­cial man­age­ment.

“The change is credit-pos­i­tive for lo­cal govern­ments as well as the cen­tral govern­ment, be­cause re­duced in­cen­tives to pro­mote eco­nomic growth at all costs will in­still fis­cal dis­ci­pline and curb the rapid rise in con­tin­gent, quasi-govern­ment debt,” said De­bra Roane, vi­cepres­i­dent and se­nior credit of­fi­cer of the sub-sov­er­eign group at Moody’s In­vestors Ser­vice in a note.

The new eval­u­a­tion cri­te­ria should lead to greater dis­ci­pline in bor­row­ing. Lo­cal of­fi­cials will be held ac­count­able for their in­vest­ment and bor­row­ing de­ci­sions, in­clud­ing those re­lated to LGFVs, and their han­dling of these de­ci­sions will be a key fac­tor in pro­mo­tions, said Roane.

The Na­tional Au­dit Of­fice’s ini­tial sur­vey of govern­ment debt re­vealed that LGFV debt alone amounted to 10.7 tril­lion yuan at the end of 2010, or 27 per­cent of GDP, of which 6.7 tril­lion yuan was clas­si­fied as di­rect debt of lo­cal govern­ments.

More­over, es­ti­mates by the In­ter­na­tional Mone­tary Fund show a much greater in­crease and level of debt op­er­a­tionally out­side the gen­eral govern­ment bud­get.

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