China Sees Drop in Nonperforming Loans

Workers erect scaffolding at a construction site in Beijing, in this July 20, 2005 file photo. China raised interest rates Friday, Aug. 18, 2006 for the second time this year amid efforts to rein in a boom in lending and construction that the government worries could spark a financial crisis. The central bank raised the minimum rate that commercial banks charge on one-year loans in China's currency, the yuan, by 0.26 percent to 6.12 percent, effective Saturday. (AP Photo/Greg Baker, file) (Greg Baker - AP)

SHANGHAI, China -- China's commercial banks reduced their ratio of nonperforming loans to total lending to 7.5 percent by June, amid signs a campaign to improve risk controls may be making progress, the banking regulator reported.

The nonperforming loan ratio for all banks was 8.6 percent at the end of 2005 and 8 percent by the end of March, the China Banking Regulatory Commission said in a report seen Tuesday on its Web site.

Banks have come under increasing pressure to cut lending to projects deemed redundant or financially risky as the government attempts to reduce excess investment that it says could spark a financial crisis.

"The regulator keeps a close watch on curbing growth in potential bad loans and is avoiding lending to certain overheated industries," it said.

The total value of bad loans fell to 1.28 trillion yuan ($160.6 billion) by the end of June, down 3.6 percent from the end of last year, the report said.

However, there was a marked gap between state-owned banks, whose nonperforming loan ratio was 9.5 percent, and newer joint stock banks, whose NPL ratio stood at 3.1 percent, it said.

China's banks have written off billions of dollars in irrecoverable loans and revamped their management to help improve their competitiveness ahead of a full opening of the banking sector to foreign competition later this year.

But experts warn the banks could face a rebound in bad debt if they fail to improve their risk management.

The commission said it uncovered 480 cases of illegal loans and other mismanagement in the first six months of this year, down from 569 cases in the first half of 2005.