As concerns about risks in the country’s financial system grow, the People’s Bank of China (PBOC) is investigating the accuracy of non-performing loans (NPLs) data at banks, people with direct knowledge of the matter told Reuters on Monday.

PBOC HQ in Beijing
PBOC HQ in Beijing

Specifically, the central bank’s financial stability bureau is investigating whether any NPLs, which is debt at risk of default, have been miscategorized as normal loans or special mention loans, according to two sources who saw a central bank notice on the issue.

Analysts widely believe China’s banking sector has far more NPLs than official data suggests and that some banks are delaying loan recognition and use off-balance sheet lending to hide bad debts. Bad debt has been building up for 18 consecutive quarters, and so far shown no signs of slowing.

Chinese commercial bank NPLs rose to an 11-year-high of 1.4 trillion yuan ($214.5 billion), or 1.75% of total bank lending, at the end of March, data from the country’s banking regulator showed last week.

Adding the additional 3.2 trillion yuan of special-mention loans, the banking sector’s total troubled lending reached 4.6 trillion yuan at end-March, a jump of 428 billion yuan from December, the data showed.

The sources said the probe was sparked by the slowing economic growth, which has led to worries that banks are increasingly covering up their NPLs to improve their balance sheets

Bank analysts widely believe NPLs in China’s banking sector are far more severe than official data suggests, as some banks delay loan recognition and use off-balance sheet lending to hide bad debts.

In a report this month, CLSA said NPLs may account for 15% to 19%.

The People’s Bank of China (PBOC) probe will look into whether banks’ assets are categorized correctly according to their quality and if there is government interference in financing for public projects, another source said.

The central bank is also checking to see if troubled assets have been secretly moved off-balance sheet and if loan repayment schedules are reasonable, the source added.

Local offices of the PBOC will conduct spot checks and on-site investigation, and issue evaluation reports, the source said.

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