China to warn banks on local govt loans -sources

BEIJING, April 20 (Reuters) - China's banking regulator plans to order banks to downgrade loans to local governments' special purpose financing vehicles if the only collateral for the loans is local fiscal revenue, two sources close to the regulator bank told Reuters on Tuesday.

Loans not backed by any collateral would also be subject to a downgrade, probably to the category of 'special mention', which would require banks to increase provisions against the loans, analysts said.

Marking down the creditworthiness of the loans from 'satisfactory' would build on an order by CBRC head Liu Mingkang on April 11 that banks must check their loans to local governments 'project by project' and demand more collateral if necessary.

Liu said then that he had ordered banks to submit the results of their inspections by the end of June.

'For those projects begun by local government financing vehicles, if they do not have cash flow but take only fiscal revenue as collateral, banks will not be allowed to categorise the loans as satisfactory,' one of the two sources said.

Some researchers estimate that local government finance vehicles have borrowed more than $10 trillion and fret that many of the projects they are funding will never be profitable, saddling banks with bad loans.

(Reporting by Beijing newsroom; Editing by Alan Wheatley)

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