Some banks are adopting stricter lending criteria for China’s state-owned enterprises (SOEs), demanding collateral from some companies they used to deem as safe as government debt, as Beijing tries to reform its bloated firms and the economy slows.
Singapore’s DBS Group, which recently suffered a loss on a bad loan to an SOE-related firm it had assessed as risk-free, plans to launch a “decision grid” to assess the creditworthiness of SOEs, according to draft internal risk guidelines.
A banker at Taiwan’s Chang Hwa Commercial Bank (彰化銀行) said that from the beginning of this year his bank would only lend to state-owned Chinese companies that provide collateral, in recognition that SOEs were no longer risk-free.
Such changes in policy suggest some foreign banks are preparing for a rise in defaults in the world’s second-largest economy, which is growing at its slowest pace in 25 years and where the government is trying to make the state sector more efficient.
DBS plans to lend more conservatively to SOEs seen as receiving less government support, as China plans to prioritize SOEs in strategic sectors. It will divide SOEs into tiers according to their likely level of government support, with subsidiaries considered more risky than top-level holding companies.
Group companies that are not consolidated into the parent SOE’s financial statements will be evaluated as an ordinary borrower.
The changes at DBS and Chang Hwa are evidence of a broader trend to tighten lending in China among foreign banks, and the practice of demanding collateral is likely to increase so they can recover some value when loans go bad.
Standard Chartered PLC said on Wednesday last week in its annual results statement it had increased the level of collateral it holds by 4 percent, in response to rising bad loans in China, India and the commodities sector.
About 70 percent of loans made in the fourth quarter of last year in China were collateralized, with the borrower typically pledging land or manufacturing plants, according to a survey of 2,006 industrial firms published by Cheung Kong School of Business.
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