More bailouts loom as staggering bad loans batter Chinese rural banks

State firms could end up forcing mergers or share capital injections.

Bloomberg reports that there might be more bank bailouts in China’s future as small lenders bear the growing weight of a distressed loan problem way beyond their size or scope with Guiyang Rural Commercial Bank amongst the biggest casualties after witnessing its bad debt balloon to nearly tenfold within a two-year period.

Also read: Chinese banks' bad loans surge to $292.55b in May

China’s campaign to crack down on financial sector risk has pushed up interbank lending costs for smaller players, further aggravated by a wider definition of nonperforming loans (NPL) that prompted banks to report more bad debt and slashed capital-adequacy ratios.

Rural commercial banks also have the highest NPL ratio amongst the country's lenders in Q1 at 3.26% which could prompt bailouts in the form of forced mergers or share capital injections. Joint stock banks and city commercial banks fare slightly better with NPL ratios of 1.7% and 1.53% respectively.

Also read: Chinese banks face risk from surging bad loans in real estate

The country's largest lenders, on the other hand, enjoy enhanced profitability with NPL ratios of the country’s ‘Big 5’ state-owned commercial banks (SOCBs) falling from 1.7% to 1.5%,  according to Natixis China Banking Monitor.

“Small and medium banks are the weakest link in the deleveraging process, because of a lack of deposits and their dependence on market funding,” said Grace Wu, head of China bank ratings at Fitch Ratings Ltd. in Hong Kong, adding that their extensive relations with non-bank financial institutions pushes up their own risk which could easily spill over to the whole financial system.

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