SMALL banks in provinces affected by the country’s efforts to slash excess industrial capacity and reduce pollution are being hit by a spate of nonperforming loans, according to reports from Chinese credit rating agencies.

Some small lenders in provinces such as Henan and Guizhou have seen their capital adequacy ratios fall to near zero or even negative due to the increase in bad loans, the reports say.

The troubles facing the regional lenders have been masked by slow overall bad-loan growth in China this year as big State banks register faster profit growth.

At least 13 lenders, including 10 rural commercial banks, have had their credit ratings cut or outlooks downgraded to negative since the start of 2017, according to an analysis of 271 reports issued by several domestic ratings agencies.

The reports attribute the rise in bad loans to small business failures as the local economy stalls, as well as the closure of factories and mines as part of China’s campaign to slash excess capacity and curb pollution, hurting the ability of companies to repay debts.

Many small banks are racing to replenish their capital to raise additional funds as provisions against nonperforming loans. The spate of ratings downgrades is making it harder for some of them to raise funds in capital markets.

“Small banks are the main forces for small business financing,” said Xu Chengyuan, chief analyst at Golden Credit Rating International Co. “Under capital constraints, they have to reduce lending.”

A shrinking of credit could have serious implications for regional economies, said Xu.

For now, the provinces of Guizhou, Henan, Liaoning, Shandong and Jilin have the highest nonperforming loan ratios in China, according to CITIC Securities.

But risks could spread to more regions if companies are increasingly hit by the financial deleveraging campaign, analysts say.

(SD-Agencies)