(Reuters) - China's central bank is preparing regulations that would allow commercial lenders to swap non-performing loans of companies for stakes in those firms, two people with direct knowledge of the new policy told Reuters.
The new rules would reduce commercial banks' non-performing loan (NPL) ratios, and free up cash for fresh lending for investment in a new wave of infrastructure products and factory upgrades that the government hopes will rejuvenate the world's second-largest economy.
NPLs surged to a decade-high last year as China's economy grew at its slowest pace in a quarter of a century. Official data showed banks held more than 4 trillion yuan ($614 billion) in NPLs and "special mention" loans, or debts that could sour, at the year-end.
The sources, who spoke on condition of anonymity, said the release of a new document explaining the regulatory change was imminent. The People's Bank of China (PBOC) did not immediately respond to requests for comment.
"Such a rule change shows banks' bad loans have risen to such a level that this issue has to be tackled now before it's too late," said Wu Kan, Shanghai-based head of equity trading at investment firm Shanshan Finance.
State banks have extended loans to government financing vehicles and state-owned coal and steel producers, so this policy can help give lenders time to deal with non-performing assets as China pushes supply-side reforms, Wu added.
The quality of assets held by banks is worse than it looks, analysts have said. To avoid stumping up capital and to protect their balance sheets, some banks have under-reported bad loans and under-recognized overdue debt.
The top banking regulator has warned commercial lenders to pay special attention to risks.
Warren Allderige, chief executive of Hong-Kong based alternative investment management firm Pacific Harbor, said the plan was positive for banks and the economy.
"It shows the government is "backstopping" the banking sector. It is also a clear sign that the government is strongly supporting GDP growth by assisting weaker companies and increasing the banks' available capacity for additional lending," he said.
Allderige, who has more than 20 years business experience in Asia, said the move would also reduce the risk of "moral hazard" in future bank lending.
"It keeps banks involved in realizing the economic value of their own defaulted loans," he said.
CABINET APPROVAL
The sources said the new regulations would get special approval from the State Council, China's cabinet-equivalent body, thus skirting the need to revise commercial bank law, which bars banks from investing in non-financial institutions.