January 22, 2014 / 8:01 AM / 4 years ago

China eases rules on banks' bad-loan write-downs

SHANGHAI, Jan 22 (Reuters) - China has issued revised rules to make it easier for banks to write off small loans, in the latest effort to help lenders deal with an expected rise in bad loans as the economy slows.

The rules, issued by the Ministry of Finance and published on the website of the Jiangsu provincial finance bureau on Tuesday, say the aim is to “strengthen financial enterprises’ risk prevention and control ability.”

Bankers and analysts have warned that non-performing loans in China’s banking system are likely to rise this year as a slowing economy, rising interest rates and policymakers’ focus on reducing new credit growth is likely to pressure weaker borrowers.

The revised rules grant financial institutions freedom to write off loans to a borrower of up to 10 million yuan ($1.65 million) without permission from the regulator, if the loans are to a small- and medium-sized enterprise or related to agriculture, and if the lender has tried for at least one year to recover the funds.

Previously, the upper limit for such write-downs was 5 million yuan.

The revisions also allow financial institutions to write off personal business loans to a single borrower of up to 5 million yuan if the institution has sought repayment for at least one year.

The finance ministry also said that if a borrower has entered bankruptcy, financial institutions can write off loans after two years, if they have not received repayment. The previous limit was three years.

Policymakers want to encourage banks to be pro-active in writing down non-performing loans as a means to clean up their balance sheets and improve the accuracy of their financial statements.

Official data shows the non-performing loan ratio in China’s banking system stood at 0.97 percent at end-September, but most analysts believe the true ratio is higher.

Banks can use various tactics to avoid recognising bad loans, including extending the maturity of loans or offering new loans to repay old ones.

For a graphic on analyst estimates of China's true non-performing loan ratio, click on: link.reuters.com/zuk92v

$1 = 6.0505 Chinese yuan Reporting by Gabriel Wildau and Lu Jianxin; Editing by Jacqueline Wong

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