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Tsunami of China Bad Loans Soar as Banks Hit by Economic Slowdown

NPLs in Shandong Guangrao Rural Commercial Bank jumped to 13.9% at the end of 2017 from 2.47% in 2016.NPLs in Shandong Guangrao Rural Commercial Bank jumped to 13.9% at the end of 2017 from 2.47% in 2016.

Small banks in Chinese provinces affected by Beijing’s efforts to slash excess industrial capacity and reduce pollution are being hit by a spate of non-performing loans, according to reports from Chinese credit rating agencies.

Some small lenders in provinces such as Henan and Guizhou have seen their capital adequacy ratios fall to near zero or even negative due to the increase in bad loans, the reports say, Reuters reported.

The troubles facing the regional lenders have been masked by slow overall bad-loan growth in China this year as big state-backed banks register faster profit growth.

At least 13 lenders, including 10 rural commercial banks, have had their credit ratings cut or outlooks downgraded to negative since the start of 2017, according to a Reuters analysis of 271 reports issued by several domestic ratings agencies.

The reports attribute the rise in bad loans to small business failures as the local economy stalls, as well as the closure of factories and mines as part of Beijing’s campaign to slash excess capacity and curb pollution, hurting the ability of companies to repay debts.

Many small banks are racing to replenish their capital to raise additional funds as provisions against non-performing loans. The spate of ratings downgrades is making it harder for some of them to raise funds in capital markets.

“Small banks are the main forces for small business financing,” said Xu Chengyuan, chief analyst at Golden Credit Rating International Co. “Under capital constraints, they have to reduce lending.” A shrinking of credit could have serious implications for regional economies, said Xu.

For now, the provinces of Guizhou, Henan, Liaoning, Shandong and Jilin have the highest non-performing loan ratios in China, according to Citic Securities.

But risks could spread to more regions if companies are increasingly hit by Beijing’s financial deleveraging campaign, which has pushed up borrowing costs and reduced credit availability, analysts say.

In Shandong, where industries like coal, steel and aluminum account for 70% of industrial output, the ratings of four regional banks have been downgraded or had their outlook cut since December due to surging bad loans, the Reuters analysis shows.

The non-performing loan ratio of one of the lenders, Shandong Guangrao Rural Commercial Bank, jumped to 13.9% at the end of 2017 from 2.47% in 2016, while annual profit plummeted 99% to 1 million yuan ($146,618) from 197 million yuan over the period.

The soaring rate of bad and overdue loans at the bank resulted from the bankruptcies of local tire companies hit by the excess capacity and pollution clampdowns, according to a report from Golden Credit Rating.

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