In recent days, the Bank Credit Asset Registration and Circulation Center unveiled startling statistics regarding the transfer of non-performing loans (NPLs) for the upcoming fourth quarter of 2024. The total number of listings for NPL transfer reached an astounding 443, marking a new record high for a single quarter since records began in 2021. Equally notable was the total amount of these listings, which soared to 123.48 billion yuan, an impressive increase of 56.7% compared to the previous yearThis unprecedented surge in NPL transfers raises the question: what has driven such a dramatic rise?

One key factor behind this phenomenon is the urgency for banks and financial institutions to accelerate the digestion of these problematic assetsA recent announcement from a commercial bank indicated that it was offering NPLs totaling 145 million yuan for sale, with a starting bid price of merely 6.63 million yuan—a staggering discount amounting to about 50%. Such strategies are becoming increasingly common as financial institutions grapple with the accumulation of NPLsOver the past year, we have witnessed a consistent trend where banks are selling off these problematic assets at significantly reduced prices to expedite the process of clearing their books.

When examining the players involved in NPL transfers, it is important to note the diverse participation from various financial institutions, including joint-stock commercial banks, consumer finance companies, large state-owned commercial banks, and city commercial banksThe year saw the transaction volumes in principal and interest for these entities reach 112.54 billion yuan, 41.44 billion yuan, 35.25 billion yuan, and 29.68 billion yuan, respectively.

The types of NPL transfer activities have also become varied and complexThese include batch transfers of individual NPLs, transfers of single public loans, and bulk transfers of corporate NPLsIn the case of batch transfers of individual NPLs, the average discount rate was 4.8%, and the average principal recovery rate was 7.3% in the fourth quarter of 2024. While these figures show a slight decrease compared to the same period in 2023, the overall growth in transfer activity is undeniable.

According to Li Guangzi, director of the Banking Research Office at the Chinese Academy of Social Sciences’ Institute of Finance, individual NPLs pose unique challenges due to their small, distributed, and high-frequency nature, making them difficult to handle and resulting in higher per-unit disposal costs

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Consequently, the generally low rates of discount and recovery for batch transfers of individual NPLs signify the growing pressure on banks’ retail businesses as concerns about growing NPLs mount.

Under multiple pressures, financial institutions are hastily working to clear their NPLsYe Yindan, a researcher at the Bank of China Research Institute, points to strict capital adequacy requirements facing banksNon-performing loans are a substantial drain on both capital and liquidity, which negatively impacts capital adequacy ratiosThus, accelerating the offloading of NPLs, particularly through sales and transfers, is a strategy to release capital and reduce risk-weighted assets, allowing banks to improve compliance and overall capital adequacyThe dismantling of these bad assets can also alleviate pressure on banks regarding loss reserves, thus helping to enhance profitability.

As financial institutions face this daunting landscape, there has been a concerted effort to establish and refine mechanisms that ensure a standard approach to asset transferThis is crucial for maintaining an orderly progression through the looming challenges of NPL disposalLocal asset management companies and financial asset management firms have emerged as vital players in facilitating the sale of NPLs, with transaction volumes for unresolved assets soaring to 163.95 billion yuan and 61.85 billion yuan respectively.

Initiatives have been introduced to improve financial institutions' professional capacities in acquiring and managing NPLsThe range of financial bad assets permitted for purchase by asset management companies has been broadened under guided policies, enabling these firms to buy up restructured assets and other impaired credits held by financial institutionsThis is an essential step for invigorating financial institutions' dormant assetsBy the end of the third quarter in 2024, commercial banks reported a non-performing loan balance of 3.4 trillion yuan, while the non-performing loan ratio stood steady at around 1.56%, showing little variation from the previous quarter.

A representative from the National Financial Regulatory Authority noted that in recent years, there have been notable shifts in the asset structures across China's commercial banks and financial institutions

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Corresponding adjustments in risk classification and regulatory systems have facilitated the acquisition of financial bad assets by management firms, supporting financial institutions in revitalizing their assets.

The backing from new policies has opened more avenues for banks to divest themselves of NPLsIn the future, there remains a pressing need to explore mechanisms for tackling bad assets more dynamicallyInitiatives such as write-offs, transfers, and restructurings are all avenues to speed up the resolution of these challenging assets while attracting more investors into the fold and elevating both efficiency and quality in the asset recovery landscape.

Moreover, Li Guangzi highlighted that the transition of NPLs is a highly effective strategy for financial institutions looking to tackle their existing stock of bad assetsSince the initiation of pilot programs for individual and public single-loan transfers in 2021, the number of participating institutions, as well as market acceptance and activity, have witnessed consistent annual growthThis accumulation of experience is invaluable as institutions strive to enhance NPL transfer processes and mitigate the accrual of financial risks.

The regulatory bodies have also taken measures to fortify the capabilities of smaller financial institutions, especially concerning non-performing loan risksDuring the 2025 supervisory working conference, the National Financial Regulatory Authority emphasized the need to expedite reforms in smaller financial entities to address risks effectivelyA key focus of these reforms is centered around NPL management and the enhancement of operational capabilities for these institutions.

Ye Yindan stated that supervisors must bolster compliance requirements for financial institutions, establishing robust mechanisms for financial risk monitoring, early warnings, and responsive strategiesThis is crucial for minimizing NPL occurrences and guaranteeing systemic financial stability.

Moreover, it is imperative for these smaller institutions to hone their lending processes and after-loan management practices to prioritize heightened risk domains, particularly in providing effective loan services

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With approximately 4,000 small and medium-sized financial institutions scattered across China, they cater to a diverse clienteleThe accumulation of NPLs presents serious risks, and thus the successful navigation of these institutions towards reform is fundamentalLocal provincial credit unions and city commercial banks are devising tailored reform strategies to control these risks while working closely with regulatory bodies.

Furthermore, improving operational capabilities forms the bedrock for small and medium-sized banks in reducing NPL levels and enhancing their risk absorption capacitiesThis can be exemplified through the use of financial technologies to improve loan disbursement accuracy, thereby curbing the advent of new risk loansIn Nanning, Guangxi, for instance, banking institutions have deepened cooperative mechanisms with tax authorities, facilitating businesses to convert tax credits into financing credibility—essentially injecting “fresh funds” into small and micro enterprisesAs highlighted by Huang Shenghua, head of Guangxi Yinfai Electronic Technology Co., they were able to secure a credit loan amounting to 491,000 yuan using their favorable tax credits through local banking apps, effectively easing recent liquidity pressures.

Moreover, post-loan management has witnessed intensified scrutiny as stringent regulations have spurred many minor banks to refine their mechanisms in loan management, leading to enhanced asset qualityTo illustrate, Zhejing Hecheng Rural Commercial Bank has been actively increasing its risk management capabilities in key areas, effectively shielding against potential risks arising from NPLs.

In conclusion, Wang Wenyu, a researcher at the China Institute of Inclusive Finance, asserts that small and medium-sized financial institutions have the onus to continuously refine their credit risk control systems, preventing credit risks from the outset and expediting their digital transformation initiatives

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