Chinese commercial banks' bad loan rate is not so high that it would have the potential to trigger a systemic financial risk, according to a senior official with the country's banking sector's watchdog.
There is no universal international standards or warning line for bad loan rates and any projections should factor in the ability of banks to digest non-performing loans (NPL) via provision funds set aside to cover bad loans, profits and capital for NPL level evaluation, Wang Zhaoxing, deputy head with the China Banking Regulatory Commission, wrote in the latest edition of China Finance, a magazine published by the central bank.
A high bad loan rate alone is not likely to cause systemic financial risk, which must take into account the overall economic conditions, corporate debt leverage and the liquidity, capital adequacy ratio and provision coverage ratio, Wang added.
The Chinese banking sector's bad loan rate rose from 0.87 percent by the end of 2012 to 1.75 percent by the end of September this year, with a total balance of 1.4 trillion yuan (206.8 billion U.S. dollars).
China has entered the new normal growth period tasked with deleveraging and destocking the economy and cutting overcapacity, which led to rising bad loan rate, however, Chinese banking sector has enough profit, provision funds and capital to ease the impact of bad loans, Wang pointed out.
Meanwhile, Chinese banks are exploring changes to their business models to improve profits, making them more able to manage risks, Wang added.
The latest quarterly financial reports of China's five major banks including the Industrial and Commercial Bank of China, and Bank of China posted steady year-on-year net profit growth in the first three quarters. Income from wealth management products and other non-traditional sources posted over 20 percent rises year on year and an average share of about one third of their total revenue.
China's credit risk is under control as long as the economic slowdown is kept in check, and there are no violent capital and property market fluctuations or massive corporate bankruptcies, according to Wang.