In Depth: Pandemic-Era Helping Hand Comes Back to Haunt China’s Banks
By Wu Xiaomeng, Liu Ran and Qing Na
A government-encouraged surge in lending designed to be a lifeline for small businesses during the pandemic has started to worry Chinese banks, as misappropriation has caused the loans to sour at an increasing rate due in part to China’s stubborn real estate slump.
The rise in banks’ nonperforming loan (NPL) ratios for personal business loans (PBLs) shows how gaps in banks’ due diligence can cause funds designed for one purpose to end up being used for something else — in ways that are damaging to lenders’ financial health.
PBLs are primarily given to individuals to cover expenses like inventory purchases and utility bills. Usual recipients are small business owners, individual entrepreneurs or farmers. Many of the loans have to be repaid within three or five years.
Chinese banks vigorously pushed the loans in response to government calls for more financing to help businesses weather the fallout from the Covid-19 pandemic. “In the wake of the Covid outbreak in 2020, the government urged banks to maintain and increase lending to customers in heavily affected industries like wholesale, retail, hotels and restaurants,” a person from a major bank with experience in the matter told Caixin.
Regulators encouraged banks to lower interest rates to a reasonable extent, increase lending on credit, and provide more medium- to long-term loans to help small businesses through the hard times. The “Big Six” state-owned commercial banks were asked to take the lead, sacrificing some of their profits to reduce fees and establish expedited channels to shorten loan approval times, the source said.
PBLs grew rapidly. By the end of this June, Chinese banks had nearly 24 trillion yuan ($3.4 trillion) in outstanding PBLs, more than double the roughly 11.4 trillion yuan on the books at the end of 2019, according to central bank data.
Large and midsize lenders drove much of the growth. By the end of June, the PBLs managed by the Chinese mainland’s 40 listed banks accounted for about half the total, or nearly 12 trillion yuan, according to a September report by Zhongtai Securities Co. Ltd.
A further breakdown showed that the “Big Six” lenders had issued 57% of that nearly 12 trillion yuan, according to the report. For the 12 national joint-stock banks, the figure was 32.5%.
Many banks’ NPL ratios for PBLs have been on the rise this year, according to a Caixin analysis of publicly disclosed information.
For the five of the “Big Six” banks that had disclosed the ratio at the end of June, the figures were up from the end of 2023. Of the five, China Construction Bank Corp. reported the biggest percentage-point increase in the NPL ratio for PBLs, which rose by 0.62 of a percentage point to 1.57%. A couple of national joint-stock banks that disclosed this information also showed an uptick in this gauge.
In comparison, the NPL ratio for loans across all commercial banks in China was 1.56% at the end of June, down 0.3 of a percentage point from the end of last year, according to data from the National Financial Regulatory Administration (NFRA), China’s top banking watchdog.
Several industry insiders told Caixin that lenders that issued a lot of PBLs could face great financial difficulties if the loans keep going bad.
China’s protracted real estate slump is one of the major reasons for the rising NPL ratios of PBLs, according to multiple banking insiders.
They said that some borrowers took out PBLs to speculate on real estate. The loans are not supposed to be used to buy property, but some borrowers did so anyway because the interest rates were so much lower than mortgage rates. Between December 2020 and January 2021 — before the real estate slump — the average mortgage rate for first-time homebuyers nationwide was 5.22%, according to the Rong360 Digital Technology Institute, a Chinese financial data compiler. In comparison, many banks offered PBLs at rates below 4% during the same period.
For borrowers who couldn’t afford to repay the loans within the typical three-year term, it wasn’t a problem. They had the option of selling the property or taking out a new PBL to pay off the old one. Because property prices more or less had always gone up in China, that looked like a safe bet.
But after the property market went into a downturn in mid-2021, with home prices falling, these borrowers had a hard time repaying their loans.
Other borrowers put up property they owned as collateral to get PBLs. Rising home prices allowed some of these borrowers to keep rolling over the loans as they came due. But once the value of their collateral started to fall, banks were no longer willing to lend them enough to pay off their earlier loans. So, more borrowers started to default.
The health of property-backed PBLs is highly correlated with home prices, said the president of one of Industrial and Commercial Bank of China Ltd.’s (ICBC) local branches in Southwest China.
The source said that the ICBC branches dealing with the greatest amount of bad loans are the ones in cities hit particularly hard by the real estate slump.
Banks are also concerned that many borrowers have used PBLs to pay off their mortgages early. Some major banks had at one point offered PBLs at interest rates well below the reference mortgage rate, according to sources with knowledge of the matter. “From last year to the first half of this year, many borrowers repaid their mortgages early,” a personal loan insider from a joint-stock bank told Caixin. “For some, the source of their funds is doubtful.”
Banks have taken actions over the past few years to tighten their loan review procedures and strengthen oversight of how funds from PBLs are used to ensure they are actually spent on business expenses rather than property. However, those efforts have struggled to eradicate misappropriation.
Banks should improve their ability to monitor how loan proceeds are used, according to a person responsible for inclusive loans at China Construction Bank. The source said that an interbank coordination mechanism should be established to allow more transparency in how the funds have been used to prevent misappropriation.
Meanwhile, industry insiders predicted the central bank’s recent move to guide commercial banks to lower the interest rates on existing mortgages should remove the incentive for homeowners to take out loans to repay their mortgages early.
Contact reporter Qing Na (qingna@caixin.com) and editor Michael Bellart (michaelbellart@caixin.com)
caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Global Neighbours is authorized to reprint this article.
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