China's top banking regulator revealed on February 19 that the nation's Big Four commercial banks recorded the largest-ever drop in their bad loans last year.

This beefs up their financial strength as the state-owned banks implement joint-stock reforms in anticipation of initial public offerings (IPOs).

The China Banking Regulatory Commission (CBRC) said the ratio of nonperforming loans (NPLs) at the Bank of China, China Construction Bank, the Industrial and Commercial Bank of China and the Agricultural Bank of China was 20.4 percent at the close of 2003, down 5.9 percentage points from the preceding year.

Their total outstanding NPLs, as measured by the internationally accepted five-category loan classification, fell 171.3 billion yuan (US$20.6 billion) to 1.9 trillion yuan (US$231.0 billion), it said.

Stricter lending policies and increased efforts to recover bad loans as well as improved risk management mechanisms were the major factors behind the significant drop in bad loans, said the CBRC.

The bad loans--amassed during the decades of China's planned economy--and low capital adequacy ratios have been the biggest obstacles to the reform of the state-owned lenders.

Regulators aim to bring the Big Four's NPL ratio down to below 15 percent by the end of 2006, when the domestic banking sector is fully opened to foreign banks in accordance with China's World Trade Organization commitments.

The State Council approved a reform package for the four state-owned banks, which account for more than half of total lending in the banking sector.

The central government later injected some US$45 billion of capital into the Bank of China and China Construction Bank for a pilot joint-stock reform, with IPOs penciled in for as early as next year. The two then used their original capital to write off part of their bad loans.

Despite the substantial declines in both the outstanding volume and ratio of nonperforming loans, "existing problems are still too apparent," according to a CBRC press release.

Blindly investing in some sectors has made it difficult to prevent new bad loans, it said. The commission decided earlier this month that commercial banks should inspect their lending to the steel, cement and aluminum sectors, where over-investment has mushroomed to serious levels.

High concentrations of bad loans in some industries, insufficient bad loan provisions and low capital adequacy ratios are the other problems which continue to plague the sector, said the CBRC.

The nation's three policy banks--the China Development Bank, the Export-Import Bank of China and the Agricultural Development Bank--saw their NPLs dip 4.5 billion yuan (US$542.0 million) to 336.0 billion yuan (US$40.0 billion) at the end of last year. They now account for 17.4 percent of total outstanding loans, down 2.4 percentage points from the end of 2002.

The 11 joint-stock commercial banks reported the healthiest NPL ratio at 7.9 percent, down 4.01 percentage points from a year earlier. Their outstanding volume of NPLs was 187.7 billion yuan (US$22.6 billion) at the end of last year.

The aggregate NPL ratio of all the "major financial institutions," which include the Big Four, the policy banks and joint-stock banks, stood at 17.8 percent, a drop of 5.32 percentage points from last year.

Big Four reform remains the top priority of the CBRC for this year.

The CBRC also vowed to keep an eye their loans, non-loan assets and off-the-balance-sheet assets, in which they found many irregularities after they began examining them in mid-2003.

(China Daily February 20. 2004)