Non Performing Loans - the view from the Bank of China
Xiao Gang is the chairman of the Bank of China and, before moving to the commercial sector, spent 15 years with the People’s Bank of China. In an interview in the latest Caijing he gives his views on the prospects for bank lending going forward. This is a translation of his answer to a question on Non Performing Loans (NPLs):
‘First of all, the problem with the quality of loans that we are facing is not a problem with the loans we have just issued, it is a problem with loans we issued after 2003, which are now feeling the impact of the crisis. The loans we have just issued won’t normally become NPLs this year or next year, especially because many of them are long and medium term loans.
Second, the impact of the fluctuations in the economy on the quality of loans in China’s banks is already clear. One clear sign is the appearance of NPLs. At the Bank of China we have recognised Rmb5bn in NPLs in the first quarter of the year, compared to Rmb2bn in the same period last year.
So why is out total number of NPLs falling? That has a lot to do with how we treat the stock of NPLs. We have a stock of Rmb80bn if NPLs. We have got better at processing them and getting some of the money back - turning some of them back into performing loans. So even though new NPLs are increasing, more efficient treatment of existing NPLs means we are keeping the total number down.’
A couple of interesting points here - first NPLs from the latest splurge of lending won’t appear for a while. This is of course true, what is more some of them might not appear at all, since loans to local government are often endlessly rescheduled rather than classified as NPLs. But this doesn’t mean they are not there or that they are not impacting the quality of the banks balance sheets.
Second, that banks are getting better at extracting at least some value from their stock of NPLs - which is good news if it is true - though it is not clear why, in a down turn, some NPLs would suddenly start producing revenue. One explanation is that the Bank of China has sold some more of its NPLs to one of China’s asset management companies, which would mean the NPLs was off Bank of China’s balance sheet but still existed as a contingent liability for the government.