* Lenders pull the plug on smaller borrowers
* Rising defaults prompt risk reduction
* Move may cause hundreds of companies to collapse
By Lianting Tu
SINGAPORE, April 25 (IFR) - Chinese banks are cutting their exposures to risky borrowers amid fears of increasing default rates in a move that threatens to trigger a wave of bankruptcies across the country.
The concerted effort to tighten risk controls comes after bad loans in the last quarter of 2013 rose to Rmb59.2bn (US$9.5bn), the highest since September 2008. Bankers now say they are under orders to scrutinise borrowers more carefully and avoid rolling over loans to riskier credits.
"Since the beginning of this year, we have stepped up efforts to stop rolling over loans to risky borrowers in underperforming industries," said a banker in the credit-approval department at Industrial and Commercial Bank of China's Zhejiang branch. "We expect more defaults this year and, so, need to tighten credit-risk control."
ICBC's management asked its loan bankers earlier this year to "stop" lending to industries suffering from overcapacity, such as steel and related trading, non-ferrous metals, shipping and coal; and to "limit" lending to property developers, the solar-energy industry, and urban construction, said the source, citing a 500-page lending guide the bank releases at the beginning of every year.
Bad loans accounted for 1% of total lending in China in the last quarter of 2013, up from 0.97% in the previous quarter, according to the latest data from the China Banking Regulatory Commission.
Reports of recent defaults have fuelled fears among banks that more loans will turn sour. Zhejiang Xinrun Real Estate failed last month with over Rmb3.5bn (US$560m) of unpaid debt owed to 19 banks and other parties. Last week, another small Zhejiang developer, Haining Lide Real Estate, also collapsed, according to local media.
As banks stop rolling over troubled loans, however, they are forcing hundreds of companies in these industries to shut down, according to Robert Davis, senior portfolio manager of INGIM emerging markets high yield dividend fund, who went on an investment trip to China in March.
"We heard many smaller companies are failing due to a liquidity crunch and we expect the situation to worsen," he said.
Bankers declined to name the borrowers that had folded, but one banker said that Shaoxing County-based Xingxin Textile Company was pushed to the brink of collapse after lenders decided not to roll over almost Rmb100m of loans.
The local government eventually stepped in and pressed banks to continue lending to the company as textile was the region's most important industry, the banker said. Xingxin Textile did not respond to requests for comment.
Without pressure from the government, however, many are going under.
In the fourth quarter of last year, as many as 50 small-scale aluminium producers located in Henan Province, Guangdong Province and in South-West China collapsed because banks stopped rolling over their loans, according to a Beijing-based academic, who follows the aluminium industry closely.
In spite of the rising bad loans, lenders have so far been able to call in credit facilities incurring only a few write-downs, according to bankers. Observers attribute part of their success to what some call an underhand strategy.
In order to entice borrowers to repay their loans in full, some lenders have been promising to reinstate credit lines in the near future, suggesting they just need to clear their books before they can extend additional funds.
The academic said that strategy had persuaded several aluminium producers to raise short-term funds from related companies, friends or even loan sharks to repay the banks. When they then reapplied for the credit line from their banks, however, these companies were met with the cold shoulder.
"It is increasingly the case of 'we want to get back loans and stop renewing as much as possible to risky industries'," said a Hangzhou-based loan banker from Evergrowing Bank, a medium-sized joint-stock commercial bank.
"A further uptick in bad loan rates could wipe out most of the bank's profits," she said, adding the lender's non-performing loan ratio was above 1% last year. (Reporting By Lianting Tu; Editing by Christopher Langner and Steve Garton)