Banners for domestic and foreign banks in a street in Shanghai. A recent survey of locally incorporated foreign banks showed that they remain optimistic about business prospects in China. [Photo/China Daily]

Increasing nonperforming loans, rise of Internet finance among major challenges for sector this year 

The nation pursued financial reforms in an orderly manner in 2014 by introducing measures on interest rate liberalization, expanding the scale of direct financing and accelerating the two way opening-up of its capital market.

With the deepening of financial reforms and continued slowdown of economic growth, Chinese banks will face increasing pressure from bad loans, narrowing of net interest margins and financial disintermediation this year.

To handle these challenges, banks must restructure their asset portfolios, focus on financial innovation and strive to operate across multiple markets, said bankers and researchers.

Here are the major challenges facing the Chinese banking industry and possible solutions:

Bad loans

Chinese banks will face greater pressure from bad assets this year. Economists said that nonperforming loans may rise further and the exposure to bad debts may accelerate this year.

NPLs and the overall NPL ratio of commercial banks increased continuously starting in the first quarter of 2012. As of Sept 30, 2014, NPLs amounted to 766.9 billion yuan ($124 billion), compared with 563.6 billion yuan a year earlier. During the same period, the NPL ratio increased from 0.97 percent to 1.16 percent, according to the China Banking Regulatory Commission.

Wen Bin, principal researcher at China Minsheng Banking Corp Ltd, said that economic growth has continued to slow since the beginning of 2014. As China has not yet found a new growth driver, traditional industries are facing elevated pressure of structural readjustment, and smaller businesses in related sectors are facing the threat of being acquired.