Pressure from NPLs to 'mount this year'

China's banking sector will face greater pressure in terms of asset quality this year and is set to confront increased difficulties in resolving nonperforming loans, according to a report issued by the China Banking Association.

The economy is at a critical stage in its transformation, and it will take some time for it to stabilize. And the acceleration of local government debt swaps and reforms of State-owned enterprises will lead to a continued growth in NPLs. Lian Ping, chief economist of Bank of Communications Co Ltd, who led the study on the development of the Chinese banking industry, said credit asset quality will deteriorate in several sectors including coal, photovoltaic, iron and steel, cement and shipbuilding.

A continued economic slowdown in regions including northeastern China will also expose these areas to greater credit risks, Lian said. "Certain companies and industries are exposed to default risks in 2016. With the deepening of interest rate and exchange rate liberalization, liquidity risk management has become increasingly challenging," he said.

The report advised banks to promote the construction of a comprehensive risk management system. Apart from improving risk management strategies, policies and processes, the banking sector should draw up guidelines on comprehensive risk management and continue to explore measures for quantitative risk management in order to effectively identify, calculate, monitor and control potential risks.

Banks also need to give stronger support to the application of new technologies such as big data to optimize their risk management models and improve their ability to forecast, identify and handle credit risks, the report said.

As of March 31, Chinese commercial lenders' balance of nonperforming loans reached 1.39 trillion yuan ($208 billion), up 9.2 percentage points from the end of last year. The NPL ratio increased 8 basis points to 1.75 percent during the same period, according to the China Banking Regulatory Commission.

"Nonperforming loans have yet to reach their peak, and banks should maintain the principle of prudent operation," Niu Ximing, chairman of Bank of Communications, told the China Banking Development Forum in Beijing last week.