Chinese Banks Struggle with New Consumer Credit Guidelines

BEIJING (Reuters) – Chinese banks are facing difficulties in complying with new guidelines from Beijing aimed at boosting consumer credit. These challenges come amidst a surge in defaults on personal loans and the struggle to identify financially stable households interested in borrowing.

Since March, financial regulators have issued multiple directives encouraging banks to provide more affordable loans to stimulate consumption as part of broader efforts to mitigate the impact of the trade war with the United States.

Initially, this led banks to promote personal loans at record low interest rates under 3%, but rates have since increased due to concerns over declining profit margins.

Loan managers and bank executives reported that raising consumer lending is tough, attributing this to low demand, a growing amount of problematic household debt, and uncertainties regarding their clients’ income.

Recent wage reductions in finance, manufacturing, and state sectors have further compromised households’ financial health, while higher U.S. tariffs contribute to fears surrounding job security and income stability.

A branch head at a state-owned bank, who requested anonymity, stated, “It’s very difficult to find borrowers for consumer loans. Banks are caught between meeting lending targets and controlling bad loans.”

Defaults could lead to penalties for branch officers, resulting in practices wherein loan officers borrow from other banks to meet lending quotas.

The People’s Bank of China and the National Financial Regulatory Administration have not yet commented.

Consumer loans grew by 6.1% in the first quarter of this year, a decline from 8.7% in early 2024 and 11% during the same period in 2023. Upcoming data for the second quarter is anticipated.

The overall non-performing loan (NPL) ratio among China’s commercial banks stood at 1.51% by the end of March, unchanged from 1.50% at the conclusion of 2024. Smaller rural banks reported a higher NPL ratio of 2.86% in the first quarter, compared to 1.22% at larger state institutions.

Though official data does not reveal overall consumer loan NPL ratios, industry insiders indicate a sharp increase in defaults on personal loans this year.

Rising Bad Loans
The struggling banks cast doubt on efforts to step up consumer lending, which is seen as a quicker fix than increasing household incomes—a more complex task requiring local governments to spend more on social welfare and civil servant salaries.

Lynn Song, chief Greater China economist at ING, warned that a debt-fueled boost in consumption may only be temporary. “Income growth-driven consumption would be strongly preferable for a sustainable recovery,” she added.

While economists are not overly concerned about the absolute levels of household debt—around 60% of GDP in China versus over 70% in the U.S.—the rapid rise of NPLs in consumer debt remains a worry.

In the first quarter, Chinese banks reportedly offered 74.27 billion yuan ($10.34 billion) in NPLs for sale, representing a 190.5% increase from early 2024, with approximately 70% being personal loans.

A loan officer at a major state-owned bank said, “We have a growing pile of bad loans. For clients unable to repay, we can only negotiate extensions.”

The officer noted that his bank prioritizes writing off NPLs over disbursing new loans.

The Industrial and Commercial Bank of China, the world’s largest by assets, revealed that its consumer NPL ratio rose to 2.39% at the end of 2024 from 1.34% the previous year, while some smaller banks are experiencing even worse conditions. For instance, Bohai Bank’s consumer NPL ratio surged to 12.37% in 2024 from 4.44%, and Harbin Bank’s increased from 3.94% to 5.51%.

Regional bank managers attribute this to clients operating under poor conditions due to the tariff war and consequent loan defaults. Another significant challenge for banks is a general reluctance among consumers to borrow.

A central bank survey of 20,000 households revealed that 61.4% intend to increase their savings- nearly a 20 percentage point rise from pre-pandemic figures.

Christopher Beddor, deputy director of China research at Gavekal Dragonomics, summarized that the core problem lies in slowing income growth, which leads households to limit spending and borrowing: “It’s not that they can’t get a cheap loan.”

($1 = 7.1770 Chinese yuan)