Some of last year's surges in NPL ratios of a small number of rural commercial banks came to light this year, with credit ratings of at least six of them cut, according to their disclosures and ratings agencies.
In China, rural commercial banks are usually small-scale lenders that serve local residents and small businesses, many of whom are focused on agriculture.
"Jumps in nonperforming loans are localized and do not constitute a risk for the whole rural commercial banking sector," said Zeng Gang, director of banking research at the Institute of Finance and Banking, which functions under the aegis of the Chinese Academy of Social Sciences.
Banks with soaring NPLs are concentrated across several provinces, namely Guizhou, Shandong, Henan, Jilin and Liaoning.
"The proportion of rural commercial banks facing surges in nonperforming loans is small," Zeng said. "And the surges were linked with individual factors, including poor management and local economies' facing the pressure of structural adjustment."
Zeng emphasized the rise in NPLs is due to risks of the past and shows little new worry. Recent tightening of regulations has uncovered past risks that were hitherto hidden, he said.
For instance, in accordance with the regulator's requirement, Guiyang Rural Commercial Bank included most of its loans overdue for more than 90 days under NPLs last year, raising its NPL ratio by 15.41 percentage points, said a report from China Chengxin International Credit Rating Co Ltd.
As for risks of the whole rural commercial banking sector, official data showed the NPL ratio moderately rose by 0.1 percentage point to 3.26 percent in the first quarter. The increase was mainly due to the NPL ratio surges at a handful of banks, while credit risk of the whole sector has leveled out and is under control, Zeng said.
"The performance of rural commercial banks is improving," Zeng said. "Relatively steady sources of savings and abundant liquidity, as well as increased interest margins, will help most rural commercial banks achieve profit growth this year."
On Friday, data from Wind showed the PE ratio of mainland-listed rural commercial banks was 11.4, higher than the banking sector's 6.5, showing investors' confidence in them.
Zhang Xingrong, managing director at Bank of China's Institute of International Finance, said: "There is still room for rural commercial banks to deal with increases in nonperforming loans."
His view was based on the average provision coverage ratio and capital adequacy ratio in the first quarter. The two indicators measure a bank's capacity for resolving bad loans.
But he also said efforts to deal with rural commercial banks' NPLs should speed up, considering these banks' weak corporate governance and possible fluctuations in regional economic growth.
Agreed Zeng. He said regulators should "keep a close watch and, if needed, take measures like liquidity support to stop the risk from spreading".
More rural commercial banks might see their NPLs rise as economic adjustments continue, he said.