Sunday, 6 November 2011

Bad loan rate adds to woes in Wenzhou

First rise in 10 years underscores the difficulty city’s business owners are having finding capital as they wrestle with rising costs and weak external demand

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Guanyu 道 said...

Bad loan rate adds to woes in Wenzhou

First rise in 10 years underscores the difficulty city’s business owners are having finding capital as they wrestle with rising costs and weak external demand

Jane Cai in Beijing
05 November 2011

The bad loan rate at Wenzhou banks rose for the first time in a decade in September as more private businesses found themselves strapped for cash in the entrepreneurial hub.

The non-performing loan (NPL) ratio of financial institutions in Wenzhou, Zhejiang province, rose 0.18 percentage points to 0.55 per cent in September from August, the official China Securities Journal reported yesterday, citing unnamed sources.

The ratio is still much lower than the 1 per cent NPL ratio for mainland banks at the end of June. However, the first month-on-month pickup in 10 years once again underscores the difficulty the city’s business owners are having finding capital as they grapple with rising costs and slackening external demand.

“Related authorities have ordered [banks] to lift their tolerance level for NPLs for small firms. Therefore, the NPL ratio will very probably keep rising over the next few months,” a local banker was quoted by the paper as saying.

The NPL balance at local financial institutions reached about 1.1 billion yuan (HK$1.34 billion) last month, the paper said.

The city gained international attention after a recent debt crisis in which at least 80 businesspeople were reported to have disappeared, committed suicide or declared bankruptcy this year.

Beijing’s tighter monetary policy has made it hard for small and medium-sized enterprises (SMEs) to get the bank funds they need for their struggling businesses and they have turned to the local underground lending market.

As the situation worsened, some business owners have declared bankruptcy or simply disappeared, which has hit the private banking system hard and prompted worries that the debt problem may escalate into a crisis that could threaten social stability.

After Premier Wen Jiabao visited Wenzhou last month, a slew of policies and measures were announced to support SMEs, including tolerance of a higher NPL ratio for SMEs’ loans and the creation of a 5 billion yuan emergency fund to help bail out cash-starved small companies in Wenzhou.

The China Banking Regulatory Commission has it will tolerate a 5 per cent NPL ratio for small-company loans.

Economists said the mild rise in the NPL ratio was not a big problem compared with credit withdrawal in both the formal and informal lending market.

“As the Wenzhou government works with the central authorities, banks and local businesses to stabilise credit in the economy, the worst in terms of panic and hysteria might be over,” said Wang Tao, an economist at UBS Securities.

Restructuring of businesses and debt would likely occur in the next few months in Wenzhou, with the help of bank liquidity and government involvement, she said.

“As export growth drops sharply and the economy slows, the situation will get worse for many small firms,” she said. “Even though their general exposures to SMEs are limited, we expect to see banks’ non-performing loans rise in the coming year.”