New rules for recognising bad loans in China are set to obliterate regulatory capital at several banks and are expected to lead to a 14 per cent rise in non-performing loans across the sector this year.
In some cases — such as that of the struggling Bank of Liuzhou, which was at the centre of the biggest lending fraud scandal in Chinese history — provisional capital held by lenders to deal with bad debt will be almost wiped out.
For years banks have treated loans that are less than 90 days overdue as “special mention” debt instead of classifying them as impaired. Some Chinese banks have kept official bad debt levels low while those classed as special mention have climbed towards 20 per cent of total debt.
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