Illustration: Luo Xuan/GT

Recent moves by China's central bank to offer liquidity to smaller banks, notably the liquidity support for Inner Mongolia-based Baoshang Bank have brought focus on the nation's banking cleanup. Baoshang Bank has been taken over by regulators since May 24 owing to serious credit risks the city commercial lender poses. 

Nonperforming loans (NPLs) in China's small and medium-sized banks, nonetheless, are hardly an issue, especially when compared with their global peers.

In fairness, efforts to encourage banks to loan to the private sector, especially small and micro-sized businesses, as part of the drive to prop up the economy would inevitably affect banks' asset quality, as the sectors in which these businesses operate largely have higher NPL ratios than that of other sectors.

For instance, the NPL ratio of the country's commercial banks stood at 1.8 percent at the end of the first quarter, according to data from the banking and insurance regulator. The NPL ratios of bank loans to the manufacturing sector and the wholesale and retail sector, which have gathered a multitude of small and micro-sized businesses, both neared 5 percent.

According to Moody's estimates, loans to small and micro-sized businesses account for roughly 23 percent of China's total loans. This means loans that fall into the small and micro-sized category are likely to add 46-69 basis points to the banking sector's total NPL ratio, based on the regulatory authorities' tolerable limit of the loans' NPL ratio which has lately been raised to 3 percentage points from the previous 2 percentage points.

Loans to small and micro-sized businesses would weigh on NPLs in the overall banking sector, but the impact - an addition of less than 1 percentage point - is limited.

On top of that, the NPL ratio readings measuring domestic banks are fairly healthy compared with their global equivalents. For example, banks in the eurozone recorded an average NPL ratio of more than 5 percent in 2017. Another example is India, comparable to China in population and territorial vastness terms, which hit a double-digit NPL ratio in its banking sector.

In China's case, the NPL ratio of smaller banks that Moody's provides credit ratings on registers roughly less than 2 percent, slightly higher than their bigger domestic rivals boasting an NPL ratio of around 1.5 percent. This remains significantly lower than their international peers that come in at about 3 percent.

That said, the assessment of asset quality cannot be solely dependent on NPL ratios. The rate of formation of NPLs is more noteworthy, which involves the disclosure and handling of NPLs. Last year, NPLs in the nation's banking sector that had been handled - the bad loans having been written off, sold, or transferred - were equivalent to 109 percent of average bad loans of last year. The ratio was way higher than that of the previous year.

It is expected that efforts to deal with NPLs will continue the momentum this year, offering another way to evaluate the healthiness of bank assets.

Also worth noting is that liquidity in China's banking sector at large is reasonably ample, despite recent moves by the central bank to ramp up liquidity support for smaller banks.

Domestic banks' loan to deposit ratio had largely been on the rise over the past two years before trending downward in the first quarter, official data showed. The change is attributed to a pickup in deposit growth, as the regulatory push to regulate the shadowing banking sector is believed to have stalled wealth management businesses, resulting in a portion of money flowing back to bank deposits. 

Although it's still uncertain whether bank deposits can continue to grow at the current pace, the overall liquidity is expected to be reasonably ample.

Additionally, the regulatory moves to offer liquidity to smaller banks indicate the regulatory authorities take systemic stability as the first priority. Ensuring stability of the financial system is supposed to take priority over efforts such as bidding farewell to the offering of implicit guarantees for bank loans and other types of investments, improving governance of banks and companies, and continuing the crackdown on shadow banks.

This suggests there is a very low chance of a systemic risk occurring in the banking sector or the risks of individual banks becoming so contagious that they risk triggering a systemic risk.

The article was compiled based on remarks by Zhu Shuning, a Moody's vice president and senior credit officer, at a credit outlook summit in Beijing on Tuesday. bizopinion@globaltimes.com.cn