Chinese bankers are concerned about credit risks connected to enterprises that are affected by the nationwide campaigns to eliminate outdated industrial capacity and curb local government financing vehicles, said a report released on Monday.

The report, based on a survey by the Chinese Banking Association and Pricewaterhouse Coopers, which polled 1,604 bankers across 31 provinces and municipalities, said 54.5 percent of the surveyed bankers said they believe adjusting the nation's industrial structures may increase credit risks to China's banking system.

Also, 31.6 percent said they believe that nonperforming loan risks are most likely to involve micro-sized and small enterprise loans. Among the bankers, 61.3 percent said the Yangtze River Delta is most likely to face the pressure of increasing NPLS, since the region is host to micro-sized and small company enterprise hubs, which face systemic risks.

Market insiders said loans to micro-sized and small enterprises have been increasingly disputed in the banking industry. While some lenders think such loans may offer new growth opportunities, others have shunned applications for such loans.

"Leaders of banks are torn over the risks of loans" to smaller companies, said a source with a Shanghai-based, State-owned bank.

On the one hand, governments at various levels encourage support from the financial sector to small enterprises to help them grow, and such loans may indeed help them out during hard times.

On the other hand, it is quite risky to make loans under current conditions. In many cases, the applicants do not have guarantees, and they are seeking unsecured loans, said the source, who declined to be identified due to the sensitivity of the matter.

NPLs have been rising in recent months, and they climbed by the largest amount in the third quarter, according to data from the China Banking Regulatory Commission.

Bad bank loans outstanding increased by 24.1 billion yuan ($3.96 billion) to 563 billion yuan at the end of September. But due to swift overall loan growth in the third quarter, Chinese banks' NPL ratios ticked up only slightly.

The system-wide NPL ratio reached 0.97 percent, compared with 0.96 percent at the end of June, the commission said.

About 43 percent of polled bankers said they have been closely watching the risks exposed to debts of local government financing vehicles.

On Dec 10, the central government announced that the performance evaluation of local government officials will no longer be based primarily on economic growth, but rather on sound financial management.

"The change is credit-positive for local governments as well as the central government, because reduced incentives to promote economic growth at all costs will instill fiscal discipline and curb the rapid rise in contingent, quasi-government debt," said Debra Roane, vice-president and senior credit officer of the sub-sovereign group at Moody's Investors Service in a note.

The new evaluation criteria should lead to greater discipline in borrowing. Local officials will be held accountable for their investment and borrowing decisions, including those related to LGFVs, and their handling of these decisions will be a key factor in promotions, said Roane.

The National Audit Office's initial survey of government debt revealed that LGFV debt alone amounted to 10.7 trillion yuan at the end of 2010, or 27 percent of GDP, of which 6.7 trillion yuan was classified as direct debt of local governments.

Moreover, estimates by the International Monetary Fund show a much greater increase and level of debt operationally outside the general government budget.