BOFIT Viikkokatsaus / BOFIT Weekly Review 2016/14
Despite hundreds of billions of yuan in profits, the big banks find themselves in a precarious situation. As they are largely state owned, they must participate in economic policy measures. The annual reports of these banks mention a range of government programmes, including the “One Belt, One Road” and the “Going Global”. At the same time, the banks lack adequate risk-management mechanisms. Their log of non-performing loans is growing, even if they claim that NPLs only represent about 2 % of the loan stock. If loans likely to become NPLs are considered, the share of bad loans rises to 7 % according to the CBRC. Even higher figures have been suggested. In any case, the NPL stock is expected to increase as the government closes plants in its efforts to reduce overcapacity.
To cover potential losses, Chinese regulations require that banks set aside reserves equal to at least 150 % of their NPL stock. Previously actual provisions were much higher but last year the loan-loss reserve ratio for three big banks (ICBC, CCB and BoC) only barely exceeded the minimum requirement. Press reports indicate the government is considering lowering loan-loss provision requirement to 120 %.