Chinese banks get serious about risk of bad debts swell

Thu Aug 7, 2014 5:09pm EDT
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By Engen Tham

SHANGHAI (Reuters) - Chinese banks are scrambling to get on top of bad debts they have downplayed for years, cutting off riskier borrowers, further tightening lending terms and, in one case, deploying teams of investigators to assess the risk of loan defaults.

China's banks keep reporting bad loan levels well below what most analysts consider realistic, but their recent actions suggest the slowing economy may be squeezing borrowers and lenders harder than thought only a few months ago.

China's fifth-largest lender, Bank of Communications (601328.SS: Quote) (3328.HK: Quote), assembled research teams last month to look over the assets of troubled borrowers in Zhejiang province, according to bank sources and an internal document. The province is a hotbed of China's credit stress.

BoCom denied that special teams had been set up or that there was any surge in potential bad loans in an email to Reuters. The bank said it had always placed great importance in its risk control efforts.

Bankers from other major listed lenders said they were further cutting lending to riskier borrowers, in particular smaller private companies.

"We're lending almost exclusively to state-owned enterprises in our department at the moment, because it's just seen as the least risky," said a senior loan officer at the Bank of China Ltd (601988.SS: Quote) (3988.HK: Quote). The banker, who would not be named because he is not authorised to speak to the media, added that the bank had also raised the bar for state-owned firms, in particular by demanding more collateral.

Bank of China could not be reached for comment on changes to its lending practices.

Lawyers for banks say increasing numbers of transactions fall through because of lenders' last-minute risk worries.   Continued...

A man sits in front of the headquarters of the People's Bank of China, the central bank, in Beijing October 17, 2013.  REUTERS/Kim Kyung-Hoon