BEIJING, July 25 (Reuters) - Banks' non-performing loan ratio in the eastern Chinese city of Wenzhou surged to 2.69 percent at end-June, the highest in a decade, as firms struggle to cope with a lingering credit crunch, local media reported on Wednesday.
NPLs of banks operating in Wenzhou, an entrepreneurial hub in coastal Zhejiang province, almost doubled in the first half of 2012 to 18.14 billion yuan ($2.84 billion), financial magazine Caixin reported on its website, citing official data.
The NPL ratio climbed from 1.33 percent at the start of 2012 and 0.37 percent in June 2011, the report said, without identifying any of the banks.
"The non-performing loan ratio of banks in Wenzhou is approaching a peak," Caixin quoted Zhang Zhenyu, head of the municipal government's finance office, as saying.
"The government will lower the NPL ratio by stepping up asset disposals and increasing cash flows," Zhang said, without giving details.
Zhang attributed soaring bad loans to a credit crunch that rocked the free wheeling city, famous for thriving private entrepreneurs and grey-market lending networks to finance them.
A string of high-profile bushiness failures prompted Premier Wen Jiabao to visit Wenzhou last October, telling banks to lend more to cash-stricken small firms and tolerate high levels of bad loans from them while demanding a crackdown on the high-interest underground lending market.
Bank's real bad loans, or those cannot be recovered, could be between 900 million yuan and 1 billion yuan, or less than 0.5 percent of total loans that compared to their combined profits of 19 billion yuan last year, Zhang said.
Commercial banks in Wenzhou are well positioned to absorb NPL ratios as high as 4-5 percent, Zhang said.
In March, China's cabinet gave the go-ahead for a pilot financial reform project in Wenzhou, including goals of setting up micro-finance companies as it tackles underground lending.
Rising bad loan costs among Chinese banks highlight growing concern that banks are feeling the pinch after China's annual economic growth slowed to a three-year low of 7.6 percent in the second quarter, the sixth consecutive quarter of slower expansion.
The Financial News, which is run by the central bank, said on Wednesday that a rise in bad loans should not be surprising as China's once turbo-charged economy loses steam.
"A rebound in banks' non-conforming loans should be expected as the economy enters a period of slower growth," the newspaper quoted Liu Yuhui, an economist at the Chinese Academy of Social Sciences, a top government think-tank, as saying.
The paper cited data from Zhejiang government as saying that non-performing loans in the province, one of the richest in China, climbed by 4.55 billion yuan in 2011 to 49.14 billion yuan at the end of the year.
The NPL ratio for the entire banking industry stood at 0.9 percent at the end of March, down slightly from 1 percent at the end of 2011, according to data released by the Chinese banking regulator.
However, many private analysts believe the real figures could be much higher. ($1 = 6.3858 Chinese yuan) (Reporting by Kevin Yao; Editing by Kim Coghill)