China Eases NPL Rules as Lending Constrained

China is making it easier for banks to lend if they declare their bad loans as non-performing. Regulations require a higher reserve ratio because its feared banks are hiding losses. Under the new rules, banks can lower their required reserves by reporting an accurate NPL accurately.

The shift is a regulatory step forward, but indicates banks are capital constrained amid deleveraging efforts. It is unlikely to boost lending when the credit market is in the contracting/disinflationary stage of the cycle.

SCMP: China cuts amount of funds banks are required to set aside for bad loans
“The measures, if realised, are quite significant for banks because they can impact their balance sheets. Cutting provisions would mean banks have more capital and can shore up their profitability. For those that are close to touching the 150 per cent red line now, they can use it to improve their balance sheets. But not all banks have the need to do so,” said Zhao Yarui, a senior researcher at Bank of Communications in Shanghai.

...Analysts said the impact on specific banks will depend on their metrics. For instance, if a bank’s capital adequacy ratio exceeds 13.5 per cent, a 120 per cent minimum provision coverage for impaired loans can be applied to the bank.

iFeng: 银监会下调拨备率低至120% 增加利润不得用于发奖金
At the same time that the regulatory tone of 2018 is set to be strong, the CBRC will give lenders a tremendous positive impact on the economy.

Surging news was informed that on 28 February, the CBRC issued the Notice on Adjusting the Regulation on the Provision for Losses of Loans to Commercial Banks (Yin Jian Fa [2018] No. 7, hereinafter referred to as "Circular 7"), setting the provision coverage ratio Requirements from 150% to 120% -150% adjustment, regulatory requirements for the loan reserve ratio from 2.5% adjusted to 1.5% -2.5%.
This chart shows the reserve ratio requirements. If 100 percent of past 90 days loans are marked as NPLs, the requirement is 120 percent reserves. Below 70 percent, the requirement is 150 percent.
Here are the coverage ratios for listed banks from their Q3 reports:

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