Banks in Hangzhou, a city of south China's Zhejiang Province, have witnessed an upsurge of non-performing loans so far this year with decaying credit quality and a profit squeeze.

The amount of new NPLs in the city has for the first time exceeds that in Wenzhou, which enjoys the largest web of underground loans in China with an active private finance market, reports Netease, citing an internal industry conference held in Hangzhou.

New NPLs hit more than 30 billion yuan in Zhejiang, and 83 percent of them are in banks in in cities of Hangzhou,Ningbo and Wenzhou, the report said.

News released from the meeting also showed that most of the bad loans are in big and middle-sized banks.

Han Yi, head of Zhejiang banking regulatory bureau, was quoted telling the meeting lenders in Hangzhou are facing three critical issues. First, cash-crunched small companies find it hard to borrow from banks, while large companies that banks prefer to lend to typically have strong balance sheets, he said, adding that new loans in the first eight months this year fell 30.3 billion yuan from the same period a year ago.

Decaying credit quality is another threat for the banking industry with barmy risks of losses of funding, the regulator said. Ending August, headline NPLR in Hangzhou climbed 0.67 percent from the beginning of the year to 1.5 percent, ranking second in all Chinese cities only after Wenzhou. Meanwhile, non performing loans balance more than doubled to 26.3 billion yuan in the first eight months.

Banks are facing even more squeezes in profits as depositors fled, he added. Local banks' lending activities are also subject to policies in headquarters, further eroding their earning capabilities, according to Han.