CHINA has granted six large banks quotas to issue asset-backed securities (ABS) with nonperforming loans as underlying assets, adding a fresh way for lenders to manage troubled loans, two sources with direct knowledge of the issue said.

    Bad loans at China’s commercial banks swelled to a decade-high 1.27 trillion yuan (US$195.63 billion) in 2015 as growth in the world’s second-biggest economy cooled to the slowest in 25 years.

    Government plans to reduce industrial overcapacity and cut off support for loss-making “zombie” firms could put further pressure on lenders’ balance sheets.

    The six banks are Industrial and Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China (AgBank), Bank of China (BOC), Bank of Communications (BoCom) and China Merchants Bank, the sources said.

    The lenders were granted a total bad loan securitization quota of 50 billion yuan, said one of the sources. The quota was issued after December, the other source said, without providing details.

    Among the six banks granted quotas, BOC has moved the fastest for its first sales of ABS based on nonperforming loans, said another investment banking source familiar with the matter.

    The bank has finished its ABS rating and is awaiting approval from the banking regulator, the source said.

    The BOC sale would be the first ABS sale backed by nonperforming loans since 2008 and would open a new channel for the country’s biggest lenders to alleviate rising credit risks.

    Lenders have been lobbying regulators to relaunch the securitization of nonperforming loans as bad loans grow.

    Special mention loans, referring to loans potentially at risk, rose to 2.89 trillion yuan last year, according to the regulator, which means that the commercial banking sector’s total troubled debts have exceeded 4 trillion yuan.

    Domestic media reported last December that BOC planed to issue 8 billion yuan in nonperforming loan ABS.

    China suspended its experimental program for all ABS in 2009 during the global financial crisis. It did not allow ABS issuance to resume until 2012. (SD-Agencies)