Sep 26, 2019 05:57 AM

Chinese Rural Commercial Banks Still Mired in Bad Loan Crisis

Guiyang Rural Commercial Bank recorded improvements and earned a ratings upgrade. Photo: VCG
Guiyang Rural Commercial Bank recorded improvements and earned a ratings upgrade. Photo: VCG

More than a year after at least nine Chinese rural commercial banks were downgraded for spikes in nonperforming loans, only one has shown some improvement, and even that may be temporary.

China Chengxin Credit Rating Group upgraded the credit rating of Guiyang Rural Commercial Bank to AA- from A+, back to the level before a rating cut in July 2018, citing improving nonperforming loans. The rating company also upgraded its rating of the bank’s bonds issued in 2015 and 2016 to A+ from A.

China’s rural commercial banks have extended a large amount of loans in risky projects in recent years, but slower economic growth has made many such loans turn sour. The other rural commercial banks that were downgraded in July 2018 haven’t recorded improvements similar to that of the Guiyang bank. Some banks’ nonperforming loan ratios declined slightly, and other banks continued to deteriorate and have been further downgraded.

Guiyang Rural Commercial Bank is based in Guiyang, the capital of Guizhou province in Southwest China, one of the country’s poorest regions. It is owned by the Guiyang city government.

The bank’s nonperforming loan ratio improved to 2.46% at the end of June from nearly 20% in 2017. Its capital adequacy ratio climbed to 7.77% from 0.91% during the same period. The bank reduced nonperforming loans by 6.5 billion yuan ($91 million) during the 18 months through June, bringing the total of bad loans down to 1.3 billion yuan, the bank’s financial statements show.

The bank disposed of nonperforming loans mainly by means of collection and legal proceedings as well as selling and canceling bad loans. In 2018, about 40% of the reduction in bad loans was through selling and cancellation.

Earlier this year, the bank sold a total of 3.7 billion yuan of nonperforming loans at a discount to three state-owned asset management companies, including China Great Wall Asset Management Co., one of China’s four biggest distressed debt managers.

These measures seemed to temporarily relieve the bank from a bad-loan crisis, but whether it can be maintained over the long term remains to be seen.

The Guiyang bank’s overall asset quality is improving after the disposal of a large amount of nonperforming loans, but cancellation and transfer of bad loans requires banks to write off large sums against its provisions for bad assets, and the quality of restructured loans should also be paid attention to, Chengxin said in a report.

Shandong Shouguang Rural Commercial Bank’s credit rating was downgraded to A+ from AA- last month by Shanghai Brilliance Credit Rating & Investors Service Co. The bank’s nonperforming loan ratio more than doubled from the end of 2016 to the first quarter of 2018. The trend continued this year to a 9.16% bad-loan ratio at the end of March.

Another bank recently downgraded by Chengxin was Changchun Development Rural Commercial Bank, even though its nonperforming loan ratio is not as high as those of the other banks.

Chengxin said the Changchun bank reduced its nonperforming loan ratio through debt cancellations, but its total loans increased too fast and have a higher concentration of nonstandard clients, putting pressure on its future asset quality and loss provisions.

Contact reporter Denise Jia (

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