China to Impose Stricter Policy on Bad-Loan Recognition

(Bloomberg) -- China’s banking regulator has told the nation’s major lenders to accelerate recognition of nonperforming loans, as officials seek to bolster the quality of lending, according to people familiar with the matter.

The China Banking and Insurance Regulatory Commission in recent weeks used so-called window guidance to inform banks with nationwide operations that they must classify corporate loans overdue for more than 60 days as nonperforming, down from 90 days previously, said the people, who asked not to be identified discussing private information.

It’s a change that underscores policy makers’ more cautious stance on curbing risks and addressing the nation’s longstanding issue of understating bad debt. Chinese lenders are sitting on more than 2 trillion yuan ($290 billion) of soured loans after flooding the financial system with cheap credit for years to prop up economic growth. While a more prudent NPL recognition practice will boost the industry’s healthiness over the long run, it may also portend a new wave of bad loans on balance sheets and weaken some banks’ capital buffers.

China’s largest state-owned banks and national joint-stock banks have until later this year to meet the new requirements, the people said. The CBRIC didn’t immediately reply a fax seeking comment.

The new requirements only apply to corporate loans and the four biggest lenders, including Industrial & Commercial Bank of China Ltd., started adopting the tougher bad-loan recognition last year, said the people.

Authorities have taken a stricter stance on dealing with China’s bad-loan issues since early last year, when it forced all lenders to reclassify loans overdue for more than 90 days as non-performing. The move soon led to a record quarterly surge in soured debt and wiped out capital at some small lenders.

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