The decrease in the ratio of non-performing loans (NPLs) of domestic financial institutions was partly because of the hefty increase in overall outstanding loans, the China Banking Regulatory Commission (CBRC) admitted on Thursday.

This is the first time the industry watchdog responded after many experts questioned the sharp fall of NPL ratios in major State banks, especially the Big-Four solely State-owned banks, in the first half of this year.

Some experts said it was just mathematical jugglery which brought down the NPL ratio because a big portion of the new loans was actually renewals of loans granted in the same period a year ago.

The State-owned banks granted 1.9 trillion yuan (US$229.4 billion) of loans from January to June, more than double the new loans issued in the same period a year ago.

A CBRC spokesperson said that the banks - which seek stock-market listings - lag far behind requirements in cutting their NPLs.

"Their ability to shoulder loan losses remains low," the official said. "Some financial institutions do not have enough reserve funds to cover loan losses."

He noted that the task of warding off financial risks and slice NPLs remains "very tough".

According to latest CBRC statistics, NPLs of China's major financial institutions, including the Big Four, the three policy-oriented banks and 11 joint stock banks, decreased by 93.4 billion yuan (US$11.2 billion) in the first half of this year.

By the end of June, outstanding NPLs of these institutions stood at 2.54 trillion yuan (US$306 billion), 19.6 per cent of the total outstanding loans during the period; 3.51 percentage points down from the beginning of the year.

The CBRC vowed to strengthen supervision in the second half to further ward off financial risks; and efforts will be made in the following aspects:

Improving loan-classification system. Banks will be urged to strictly follow the classification system; and establish a scientific and comprehensive risk-control system;

Strengthening inspection of domestic banks with special attention to their asset quality, profit-earning ability and liquidity;

Establishing new accounting systems so that the banks' books better reflect their operational performance. Banks will be urged to set aside enough reserve funds and work harder to collect outstanding loans;

Conducting an overall risk inspection which will even cover non-credit assets. If problems are discovered, not only will the persons concerned be punished, but also the higher-level branches or even the headquarters will be investigated; and

Promoting comprehensive reform in solely State-owned banks to improve their corporate governance and strengthen their internal control.

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