Some of the banks gradually lowered their NPL rate through better lending practices, but the majority received cash-injections from the government which allowed them to shore up their balance sheets and bring their NPL rates down into the mid-single digits.
In the wake of the Chinese earthquake, the Chinese government has ordered banks to write off what will be billion dollars in debt for assets that were destroyed in the May 12th earthquake. It's a good way for the government to support the people, but it also has some benefits for the banks.
Estimates are that the earthquake destroyed about 3 million homes and damaged another 14 million. Although the exact dollar amount of the relief isn’t yet clear, it is very likely that some of those loans likely would have been China’s version of ‘subprime’ and would not have been fully repaid. So the debt relief for the Sichuan earthquake victims will certainly help them get started on their new life, but it will also help lower the banks' outstanding NPLs.
One of the primary beneficiaries is the Agricultural Bank of China (ABC) who had over $1.2B in quake related losses. Compare this to the Bank of China, who had around $25M. ABC has had tremendous NPL issues in the past largely down to the fact that much of its business is outside of the major cities, including rural Sichuan, where the credit quality tends to be pooer. Simple capital injections weren’t enough to get their NPLs under control. A blanket write-off will certainly help their financial position.
There would likely have been a large % of the loans in Sichuan that would have been repaid, so by writing off all of the debt, both good and bad, some banks will lose some profits. However, the silver lining for China is essentially being able to clean-up NPLs without drawing much international attention as it's all part of rebuilding after the disaster.