A visitor takes photos of the headquarters of China Banking and Insurance Regulatory Commission (CBIRC) in Beijing File photo: IC

 As the COVID-19 pandemic pummels the global economy, the banking industry - particularly small and medium-sized banks - is bracing for a squeeze in profitability and rising bad debt rates, but experts note China's stable interest rates and the government's strong policy support could help the industry dodge financial risks.

The First State Bank, one of the oldest banks in the US, was closed on Friday under the impact of the pandemic, due to excessively low capital levels.

Dong Dengxin, director of the Finance and Securities Institute at Wuhan University, said that the bank might have suffered from the US Federal Reserve's drastic interest rate cut, and China' banks are still relatively safe, backed by the country's relatively stable interest rates.

"A stable interest rate is crucial for the profitability of the banking system as it allows flexibility in banks' pricing," Dong said. "The near-zero interest rate in the US means banks are allowed less profit, and a squeeze on profits will be fatal for smaller banks."

China has yet to impose any drastic policy change on its interest rate, and the country's small and medium-sized banks have been performing "within a reasonable range," according to the China Banking and Insurance Regulatory Commission.

There are currently over 4,000 small and medium-sized banks in China, accounting for around one quarter of the total banking system, the Commission said.

However, the sector is still facing risks from mounting bad debts, as most clients are small and medium-sized companies who are the most vulnerable and hardest hit during the economic shutdown.

"As many small enterprises face shutdowns, the threat of rising bad debts will face the smaller banks," Dong said. "But as far as I know the sector is still running in a comfortable range, as many local governments will compensate for the potential loss, and financial aid will be provided in the case of uncontrollable bad debts in small banks."