The recent increase in cost of financial risk is "both normal and necessary", considering the massive impact of COVID-19 on the economy, and the financial sector is expected to make a greater contribution to further boost economic recovery, according to a regulatory official.

By the end of June, China's outstanding balance of nonperforming loans to small businesses with a total credit line of up to 10 million yuan ($1.45 million) per borrower, namely, the balance of nonperforming "inclusive loans"－or loans to such small businesses－reached 0.4 trillion yuan, up 9.25 percent from the beginning of this year. The nonperforming inclusive loan ratio was 2.99 percent, 0.88 percentage point higher than the NPL ratio of various types of loans.

"The current nonperforming inclusive loan ratio is close to the level of tolerance for NPLs we set previously," said a spokesman for the China Banking and Insurance Regulatory Commission.

"However, considering that the novel coronavirus outbreak is a disaster of the century, the financial sector still needs to contribute more to support complete economic recovery. In addition, ensuring security in enterprises and stabilizing employment will help to secure banks and stabilize finance. Therefore, the recent increase in cost of financial risk is both normal and necessary."

Inclusive finance has made great progress in China in terms of quantity and quality.

"Our inclusive finance is gradually realizing precision irrigation (reaching more precisely to targeted customers and businesses) through reform and opening-up, technology empowerment and strengthened management. The credit risk is generally controllable," the spokesman said.

Financial institutions in the banking sector are stepping up efforts to dispose of nonperforming loans and increase provisions for possible loan losses.

"Based on the actual situation this year, the banking sector plans to dispose of about 3.4 trillion yuan of nonperforming assets for the whole year, up by 1.1 trillion yuan from last year. As a result, China will further strengthen the risk resistance ability of its banking sector," the spokesman said.

More pressure expected

Zeng Gang, deputy director-general of the National Institution for Finance& Development, said China may come under the pressure of rising financial risks in the next two quarters, especially in the first quarter of next year, as risk may further arise from delayed repayments on inclusive loan principal and interest. But it will depend on the progress of pandemic control and the economic recovery.

"Further strengthening policies to support small businesses is a crucial part of risk control in the future," Zeng said.

"Apart from responding to these policies, banks should also step up technology innovation to reduce costs effectively with the help of the internet, big data, and combined online and offline operations. This will also help banks identify the clients that are worthy of lending to through more precise identification and evaluation of risks based on big data."

At the same time, the China Banking and Insurance Regulatory Commission will fulfill its commitment to opening-up, continue to steadily raise the level of opening-up of the banking and insurance sectors while ensuring financial security, keep improving regulatory measures and enhance the capacity of financial management and risk control by opening-up.

The regulator has given approval to foreign banks and insurers to establish nearly 100 institutions of various types in China since 2018.