Are smaller banks bearing the brunt of China's bad loan problem?

NPLs for the ‘Big Five’ largely fell whilst those for smaller rural commercial banks rose to 3%.

As the country’s largest lenders enjoy enhanced profitability from lower bad loan levels brought about by a macro-economic recovery, smaller lenders have not emerged unscathed as they bear the brunt of defaults and rising interest rates.

Whilst the non-performing loan ratios for the country’s ‘Big 5’ state-owned commercial banks (SOCBs) fell from 1.7% to 1.5%, rural commercial banks (RCBs) have seen theirs rise from 2.5% whilst those for joint-stock commercial banks also inched up 0.1%, according to Natixis China Banking Monitor.

China has made some headway in denting its distressed debt, according to a report from Deloitte, as year-end nominal and relative levels within the country’s banking sector clocked in at $254.2b and 1.74% respectively in Q4.

“The growth in the use of debt for equity swaps, non-performing loan (NPL) securitisation and distressed debt management foreign buyers have been increasingly participating in a market that has seen lower levels of activity since the onset of the financial crisis in 2008,” Deloitte said.

However, the use of debt-for-equity swaps have been argued to be more accessible to larger lenders like SOCBs, possibly contributing to their declining NPLs and leaving smaller lenders to bear the hit of the fallout.