China eases banks' bad-loan coverage ratio to 120%

The lower non-performing loan rules will allow banks to extend more credit.

Bloomberg reports that China is relaxing guidelines that govern the amount banks should set aside to cover non-performing loans after the China Banking Regulatory Commission reportedly issued a notice lowering the previous coverage ratio from 150% to 120%.

According to the notice, the CBRC will proceed to differentiate the amount of provisions a bank must hold within the new band of 120% to 150%, based on the level of its capital, the accuracy of its loan classification policies, and its proactiveness in handling bad loans, the sources told Bloomberg.

The lower bad loan coverage rules will enable banks to extend more credit and effectively unlock more profits.

Although much has been said that the move was done to spur activity as Asia’s second largest economy slows down amidst systemic risk reduction policies, some analysts doubt that it was designed to boost credit growth to support economic growth.

“Instead, as part of the de-leverage campaign, the loan demand has returned from the off-balance sheet sector to on-balance sheet, as such, bank lending has again played a more important role. The reduction of loan provision coverage ratio will help alleviate the pressure for banks,” OCBC Treasury Research said.

Here’s more from Bloomberg.