Directions (next ten questions): Read the following passage carefully and answer the questions given below it. Certain words/phrases are given in bold to help you locate them while answering some of the questions.
Over the past few days alone, the China's Central bank has pumped extra cash into the financial system and cut interest rates. The aim is to free more cash for banks to lend and provide a boost for banks seeking to improve the return on their assets. The official data though, suggested that bad loans make up only 1.4% of their balance sheets. How to explain the discrepancy ? One possible answer is that bad loans are a lagging indicator i.e., it is only after the economy has struggled for a while that borrowers began to suffer. Looked at this way, China is trying to anticipate problems keeping its banks in good health by sustaining economic growth of nearly 7% year-on-year.
Another more worrying possibility is that bad loans are worse than official data indicate. This does not look to be the cause for China's biggest banks, which are managed conservatively and largely focus on the country's biggest value and quality borrowers. But, there is mounting evidence that when it comes to smaller banks, especially those yet to list on the stock market, bad loans piling up. That is important because unlisted lenders account for just over a third of the Chinese banking sector, making them as big as Japan's entire banking industry.
Although, non-performing loans have edged up slowly, the increase in special-mention loans (a category that includes those overdue but not yet classified as impaired loans) has been much bigger. Special mention loans are about 2% at most of China's big listed banks, suggesting that such loans must be much higher at their smaller, unlisted peers. Many of these loans are simple bad debts which banks have not yet admitted to. Another troubling fact is that fifteen years ago, the government created asset management companies (often referred to as bad banks) to take on the transfer these companies had little to pay. But, last year, Cinda, the biggest of the bad banks, bought nearly 150 bilion Y uan ($ 24 billion) of distressed assets last year, two-thirds more than in 2013.
These assets would have raised the banks bad-loans ratio by a few tenths of a percentage point. although such numbers do not seem very alarming, experts who reviewed last year's results for 158 banks, of which only 20 are listed found that 'shadow loans', loans recorded as investments which may be a disguise for bad loans have grown to as much as 5.7 billion Yuan, or 5% of the industry's assets. These are heavily concentrated on the balanace sheets of smaller-unlisted banks, and at the very least, all this points to a need for recapitalisation of small banks.
