China’s new risk classification to improve banks’ transparency over bad loans: S&P

S&P estimated an NPA ratio of 7.6% as of end-2022 vs reported NPL ratio of 1.71%.

China’s updated asset classification system will improve bank transparency and shave opportunities for lenders to paper over problem loans, says S&P Global Ratings.

"China's risk classification of problem assets will get stricter under the new rules. This will minimize opportunities for regulatory arbitrage," said Ming Tan, S&P Global Ratings credit analyst. The stricter rules will widen the net of assets that must be officially reported as nonperforming.

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As an example of possible underreporting, S&P had estimated that China’s non performing asset (NPA) ratio was 7.6% at end-2022. However, the reported regulatory non-performing loan (NPL) ratio was only 1.71%.

"The new measures could improve asset quality indicators for banks, by making them more reflective of macroeconomic trends and corporate health," added Tan. "They can reduce the somewhat counterintuitive phenomenon of asset quality improving through periods of economic stress."