Chinese banks could face higher bad-loan ratios this year amid credit tightening, a research report said yesterday.

China's tight monetary policy could weaken bad-loan dilution as a result of slowing loan growth and the deterioration of special-mention loans to non-performing loans for marginal borrowers, said Ryan Tsang, senior director of financial institution ratings at Standard & Poor's.

The economy scale effect that Chinese banks have enjoyed for the past five to six years will be lessened by tighter quotas on the number of loans banks issue, said Tsang.

Amid tight monetary conditions, companies will have more difficulty finding financing, which may disturb operations and lead to a possible deterioration of assets.

Banks are under the central bank's "window guidance" due to a tightening monetary policy.

The central government shifted its moderate monetary policy to tight in December for the year ahead to fight inflation.

The consumer price index, the main gauge of inflation, grew at the fastest pace in more than 11 years at 7.1 percent last month.

"Lending in China has ballooned in recent years, ratcheting up credit risks," said Liao Qiang, a Standard & Poor's credit analyst. "In a still-remote scenario, a large-scale deterioration in loan quality could hurt ratings."

A big-scale reform of the Agricultural Bank of China could bring down the bad-loan ratio but excluding the ABC effect, non-performing loans are under some pressure, said Tsang.

ABC is the final state-owned bank to be reformed. The bank's NPL ratio reportedly increased from 2006's 23.55 percent to 23.64 percent at the end of last year.

Deputy Finance Minister Li Yong earlier was reported as saying that one-third of China Investment Corp's US$200 billion start-up capital, or US$66 billion, will be injected into China Development Bank and Agricultural Bank for restructuring.

The average bad loan ratio at banks in China dropped from 7.09 percent to 6.17 percent last year, said the China Banking Regulatory Commission.

State-owned banks are being reformed through bailouts to help them shed bad loans. Industrial & Commercial Bank of China, Bank of China and China Construction Bank have received a combined US$60 billion in bailouts.

``Domestic credit risks outweigh subprime woes for Chinese banks,'' the rating agency said.

The direct impact on most Chinese banks of the subprime crisis should be limited due to relatively small exposure, S&P said.