China's new funding facilities carries risk asset for eligible banks

Credit risks will still accumulate from inclusive loans, analysts warned.

China’s jointly-established funding facilities is valuable for local and regional banks’ profitability and will ease immediate pressure on small firms, but doesn’t address the inherent risk asset for these enterprises, according to a Moody’s analysis.

On 1 June, the People’s Bank of China (PBOC) banded with four other regulators to set up two funding facilities targeting inclusive financing of local and regional banks, or lending to micro and small enterprises with a credit limit of $1.4m (RMB10m). Under the first facility, $5.6b (RMB40b) will be allotted to anchor loan extensions, with the PBOC granting funds to banks to encourage them to extend repayments of inclusive loans.

Under the second facility, $56b (RMB400b) will be granted for credit loan support, with the central bank providing funds amounting to 40% of inclusive loans issued by eligible banks between 1 March and 31 December. The PBOC expects the use of these funds to result in $141b (RMB1t) of new inclusive financing, Moody’s said.

The incentives and cost savings from the funding could boost the profitability of eligible local and regional lenders, analysts said, with estimates that savings could amount to $6.6b (RMB47b) and improve return on assets by 5bp. That being said, the facilities will not slash banks’ asset risk because it will still accumulate credit risks from the inclusive financing loans, they wrote.

In addition, utilising the funds carries the danger of exposure to weak borrowers, given that the non-performing loan ratio for inclusive financing was 3.22% at end-2019, much higher than the ratio of 1.86% for all bank loans. Whilst the new facilities will reduce repayment pressure by around $522b (RMB3.7t) of loans, they could result in around $141b (RMB1t) of new loans by end-2020, analysts warned.

However, the fact that the credit loan support facility will be restricted to Class 1-5 banks only could reduce the asset risk, as such banks have stronger financial positions and follow better risk management practices in dealing with MSEs, analysts reassured.

Moreover, the facility will have a limited effect on bank capitalisation because the creation of new loans will imply inclusive loan growth of 15.6% for local and regional banks if no previous loans mature, the report concluded.

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