Domestic banks used to pin high hopes on the growth of personal housing loans as a new source of profit. But the increasing rate of non-performance among such loans in Shanghai shows that they might have been too optimistic.

If they are to improve their bottom lines and further reduce bad loans, Chinese banks must more carefully watch the quality of housing mortgages when vying against each other to woo buyers.

The latest statistics indicate that, with the upswing in local house prices losing steam, Chinese commercial banks in Shanghai saw a 37-per-cent rise in the sum of bad loans awarded to home buyers in the first three quarters this year.

In those nine months of this year, outstanding bad housing mortgage loans jumped by 580 million yuan (US$73.3 million), to 2.13 billion yuan (US$269 million) - thus raising the bad loan ratio of housing mortgages to 0.86 percent.

Admittedly, both the sum and the ratio of such bad loans were not serious in comparison with these banks' overall lending. The total value of their outstanding bad loans stood at 48.47 billion yuan (US$6.13 billion) at the end of September, with a bad loan ratio of 2.69 percent. In other words, housing mortgages still perform better than other loans.

However, what matters is not the current level of bad loans in housing mortgage. It is particularly disturbing that the bad loan ratio of housing mortgages is rising while domestic banks manage to cut down the total amount of bad loans.

The rapid expansion of housing mortgages as a type of new and profitable personal loan contributed considerably to the market-oriented transformation of domestic banks in recent years.

Surprisingly, the rising ratio of bad housing-mortgage loans shows that this boost is turning quickly into a drag, if a relatively insubstantial one at present.

This is a dangerous signal that all domestic banks, in Shanghai and elsewhere, should pay close attention to.

Despite the central government's efforts to rein in the excessive rise in house prices, domestic banks are generally reluctant to slow their pace of granting housing mortgages, which can yield handsome profits and enlarge their total lending to bring down the overall level of bad loans. Some domestic banks have even put the growth of such lending before due prudence.

Yet housing mortgages are not risk-free, especially when house prices stop soaring.

House prices in Shanghai had once led the rise in major cities across the country. But as they flatten out this year, the amount of non-performing housing mortgages is simultaneously climbing.

The correlation between house prices and the bad loan ratio of housing mortgages demonstrated in Shanghai's case should be a reminder to all domestic banks.

(China Daily October 19, 2006)