The bad loan ratio at commercial banks in China dropped to 1.3% by the end of June, down 0.28 percentage points, the China Banking Regulatory Commission (CBRC) said. Bad loans shrank by CNY42.5 billion to CNY454.9 billion. The banks’ non-performing loan ratio is likely to rise as the pace of economic growth slows down, with the ratio staying below 10% until the end of 2012, ratings agency Standard & Poor’s said. Credit risks are rising but the industry has the strength to avoid them, backed by good operating profitability, strong liquidity and adequate capitalization, Standard & Poor’s added. Lending to local government financing vehicles accounts for 18% to 20% of total loans in the banking system. “It’s highly likely that some of these loans will turn bad over the next few years, given the questionable credit quality of many of the borrowers,” the ratings firm said.