China's banking regulator has told its lenders they incorrectly classified about 20 percent of their outstanding local government loans into the safest category of lending, Bloomberg reported on Saturday, citing a person with knowledge of the matter whom it did not name.
The country's banks were told by the China Banking Regulatory Commission they underestimated the risks on about 1.8 trillion yuan ($286 billion) worth of local government lending when they decided the loans were fully covered by cash flow, according to the report.
A reclassification of the loans would require the banks to set aside more money in loan-loss provisions, which may in turn eat into earnings.
Calls to the CBRC outside office hours were unanswered.
Agricultural Bank of China and its bigger rival China Construction Bank both put aside more in loan-loss provisions in their last financial years.
To build infrastructure across China and stimulate economic growth, local governments borrowed heavily from banks in 2009 and 2010 and are now seen as a major threat to China's economy as many of them cannot repay their debts.
The Chinese government said last year that local governments had borrowed an estimated 10.7 trillion yuan and analysts estimate at least a fifth of the loans may be delinquent.
Beijing has so far not publicly announced a comprehensive plan to deal with a flood of bad government loans. Instead, it has told banks to roll over bad debt on a selective basis.