（Photo: Global Times)

China's banking regulator has announced it would adjust the provision coverage ratio for commercial banks from 150 percent to a range of 120-150 percent and the loan provision ratio from 2.5 percent to a range of 1.5-2.5 percent. The notification also said the ratios will be adjusted on a case-by-case basis within these ranges. These steps show China is moving forward with curbing bad debts. 
There has been skepticism over the official nonperforming loan (NPL) ratio in the Chinese banking system, with many believing that it is understated for various reasons.
Some companies try to hide their situation by using new loans to pay back old ones, taking bridge loans and even asking banks to hide the classification of debts that are already problematic. 
Some local governments ask banks not to reduce loans, add conditions or reflect risk factors.
Some banks, in order to pass evaluations, roll over loans to bring down the number of NPLs. 
Market risk and credit losses haven't been recognized or even uncovered in some regions and industries.
The new regulations will contribute to a more accurate picture of bad debts, putting longstanding doubts about Chinese bad debt statistics to rest. Banks have leeway to hide bad debt by means such as classifying potentially risky loans as special mention loans. Regulatory authorities will consider the accuracy of loan classifications, such as the NPL ratio of loans that are more than 90 days past due, when adjusting the ratio for individual banks. 
Applying case-by-case evaluation can help eradicate the breeding grounds for bad debt. Other than the accuracy of loan classification, there are other criteria to consider: How actively dispose of bad loans and a bank's capital adequacy. 
These criteria can encourage banks to improve their loan management, speed up the disposal of NPLs and maintain a reasonable capital level at the same time. 
The regulatory requirement on provision adjustments will not have a substantial impact on the banking system's ability to absorb risk.
The provision coverage ratio in the Chinese banking system has stayed at a high level. Only 70 percent of countries around the world have mandatory requirements for the provision coverage ratio. The rest simply monitor it. Most countries have set the ratio between 50 percent and 100 percent. As long as there is credibility on bad debt numbers and accurate debt classification, a 100 percent provision coverage ratio is more than enough. Therefore, there is room for reduction. 
The provision coverage ratio of Chinese commercial banks may have exceeded 150 percent. While China is entering the stage of high-quality economic development, lowering provisions for bad loans is essential for commercial banks to speed up disposal of bad debt and increase their asset quality. 
Overall, the rebounding Chinese economy, higher company profitability and improvement in the NPL situation have provided space for this regulation. The growth rate of NPLs at commercial banks has stabilized since the latter half of 2016, while banks' profit has been rising steadily. 
Statistical methods for measuring NPLs are different, so there is no international consensus on China's NPL ratio. The NPL ratio of the nation's banking system is still at a relatively low level, whether vertically or horizontally compared. 
In 1999, four asset management companies (AMCs) were established to remove bad debt from State-owned commercial banks in China. Since August 2014, the banking regulator has allowed the establishment of local AMCs. Now there are more than 40 AMCs at the city and provincial levels, utilizing multiple methods such as lowering the threshold for mass transfers of bad debt, to make sure the risks are under control.
However, the asset quality of commercial banks is tied to the real economy's growth. Since the financial crisis in 2008, the banking industry worldwide has been damaged. Though governments in many countries relieved the burden for commercial banks with administrative orders, bad debts stayed in the financial system. Only if the economy gets back on track, which leads to fundamental changes in the external environment for the banking and financial industry, can the asset quality of banks get substantially better. The banking industry in China is now up to the challenge. 
Tighter regulation in recent years has curbed impulsive lending while balancing risks and benefits. Observers hope that relevant parties can work together to eradicate the breeding grounds for bad debt. Only then can China's banking industry escape the endless loop of "accumulation-removal-accumulation."